Some Canadian pensioners can retire a little easier knowing that the $146 billion Canada Pension Plan Investment Board stands to gain a huge 3x-plus return of about $930 million from the sale of its direct stake in Skype Technologies to Microsoft. The investment seems to be a major validation of the strategy of several large Canadian pensions to take large, direct stakes in private companies.
CPPIB was one of three investors that together bought a 65 percent stake in Skype from Ebay in 2009, the others being buyout shop Silver Lake and venture firm Andreessen Horowitz. Skype’s founders and Ebay retained the rest of the company, about 35 percent.
The big pension is likely to add the sale’s proceeds to its passive, reference portfolio. CPPIB does not have an asset allocation strategy, but its private equity and direct investments total about 15 percent of the overall portfolio, or $22 billion.
CPPIB originally invested about $300 million in what is now a 12 percent stake (diluted from 15 percent) in Skype, a transaction that valued the company at $2.9 billion. In addition, CPPIB invested about $50 million in the deal through a Silver Lake fund, which ultimately should net the pension an additional $133 million or so net of fees. As a result, total distributions from CPPIB’s Skype investments are likely to amount to about $1.06 billion.
Over the last six years, ever since the pension got Canada’s go-ahead to make active investments, its strategy has been to develop strong relationships with several well-performing private equity firms and invest directly with them if good opportunities arise. That was the case with CPPIB’s Skype stake, which came to them through the pension’s long-standing relationship with Silver Lake.
Buying direct stakes in private companies has major consequences for pensions like CPPIB. On the plus side, returns come without having to pay management and carry fees, typically one percent of assets plus a 20 percent share in overall profits. A private equity firm delivering the same return would have charged $126 million for the carry alone. By taking direct stakes, that money now flows to Canadian pension holders.
On the negative side, direct investments can represent rather large bets, so failures can weigh heavily on returns.
CPPIB is also a big direct investor in infrastructure projects. According to a report from Reuters, our sister news wire service, CPPIB is considering buying a stake in an oil pipeline owned by Norway’s Statoil. In addition, CPPIB has participated in private deals to buy stakes in companies like IMS Health and Macquarie Communications Infrastructure Group.
No word on which, if any, of CPPIB’s portfolio companies might be sold next.