RE at Pension Funds in Canada - What do they do?
Since covid started, I’ve pretty much exclusively seen job postings for real estate roles at pension funds in Canada. I’m curious as to how involved their real estate teams are in the underwriting, due diligence, etc. process, specifically CPPIB, HOOPP, IMCO, and PSP? I’ve worked with a couple of those funds before, and from what I’ve experienced they just look over the investment memos and pre/post DD Argus models. Is that typical?
Lastly, once you start working at a pension fund how hard is the move back to REPE?
Some of them are investors in our funds. For that, they do zero deal level underwriting. We do have some one off investments with them where they review proformas we send them, but they lean on us for actual real estate underwriting. In short and from my limited perspective, there is very little touching of the bricks and sticks. Others may have a different view.
You could move back to REPE, but it is likely to be more in a capital formation role than a transaction role. All of that can very by firm and by person obviously.
Was previously at a Canadian pension fund so I can help shed some light.
Typically in the RE space, Canadian pension funds are always seen as a great capital source globally and as such, you get every single GP contacting you for deals as an LP investor. Being an LP, you don’t need to underwrite deals from the “bricks and beans” and rely heavily on the dd materials provided by the GP. Whenever a deal came through we would take the GP’s model and use their numbers and ask them to run sensitivities for us. We would then be responsible for writing up the memo and voila.
Ultimately, your job is allocating capital to get risk-adjusted returns that meet the funds threshold.
I was in a London office, but all teams operated the same globally (not sure if the other funds operate the same). Left because I found myself getting tired of writing memo after memo. Worked on a lot of big projects but at the end of the day, I felt like I didn’t contribute much to it; I just helped fund it. Pay and culture was great. Hours are reasonable.
Left to a REPE shop but it was very difficult as I was mid-level and wasn’t willing to take a pay cut. London REPE salary is total garbage. It was also difficult to prove that you could source deals and make a case on why you want to leave a huge LP to a GP. Granted, most people don’t leave.
Is this a saying in Cananda? If so, I love it.
It's "Bricks and sticks" or "Sticks and bricks" here in America.
I came across this Canadian phrase on r/financialcareers once:
"Just do a good job and eat your pancakes."
Great info. Canadian funds are placing capital everywhere. How was the process dealing with GPs? Also what types of IRRs were you targeting for different asset classes (MF, Hotels, office, etc)?
I find it crazy though that the fund would rely heavily on GP numbers. I am guessing most of the GPs were mega sponsors with large AUM?
The process dealing with GPs really ranges from investment to investment. For some of the larger GPs the process was really smooth. Typically we would already have a standing relationship with them and they would bring forward the deal. They would do a large part of the underwriting already and provide us with the details. We would then underwrite it simultaneously to make sure the returns they're extrapolating are correct. The information however, are all provided by them. We would then negotiate terms for the LPA and the whole process would be seamless. The larger GPs are very sophisticated and if the base returns make sense, our capital is in. As an LP, we don't really focus on underwriting the specific deal because most of the time, the GP would have equity involved and interests would be aligned. What we really underwrite is the manager. How's their track record? How's their reputation? What's their reach? What value do they add? We also look at who they partnered up with before and interview them to see how the relationship was. We really spend a bulk of our time underwriting the GP...
For MF we typically look for 10-15% IRR. Ground up hotel development 15-25% IRR. Industrial and Office 8-12% IRR. However, my colleagues in South America are targeting much higher returns as their office mainly focuses on opportunistic investments.
Canadian pension funds are big players globally. Generally they been good to work with, and I like their mannerisms. They ask a lot of questions. Canadians have some envious maternity leave policies (“ à l'année prochaine” / google translate for see you next year) compared to their southern neighbor.
Pension funds by their nature are pretty risk averse, as their primary goal is i) preservation of pension fund capital and ii) respectably growing that capital. Most invest in core deals in core markets with low, stable returns. IMO maybe the most boring place to work in real estate.
Pretty much this - the investments guys don't do a whole lot of the actual underwriting, they just assess the models GPs provide and ask questions/stress test. There's not a ton of variety in the deals either, I think it would get boring really quickly. They will typically do their own underwriting for large (~$1B+) deals though, as is good practice.
That being said, some of them are getting into more large scale partnerships and OpCo investments (see: Cadillac Fairview's investment in Lincoln Property Company last year). That stuff is more interesting and I'd imagine more rigorous analysis.
Personally, I think an investments role at a pension fund would be boring, but their development teams work on a ton of cool projects. Either way, they work pretty cushy hours and get paid great, great benefits too.
It seems that these pension funds operate as a capital allocator. However, isn't that the same for many REPE funds out there? Some REPE funds are very heavy on modeling and what not but probably close to half of the funds on the 50 list just operate as capital allocator. Even the mega funds of the world like Carlyle or even Blackstone do a ton of JV deals with GPs. These funds may do more due diligence but at the end of the day, GPs source deal, execute, and handles all of the heavy lifting.
My opinion is that the pensions funds and capital allocator REPEs (aka pension fund advisors) are similar in process. The biggest nuance is not all pension funds are comfortable with direct investments (Invest in a sponsor’s pipeline) like some of the Canadian public funds mentioned, and they outsource to pension fund advisors.
The other thing is the mega funds tend to work with the mega sponsors (not always) but they want to allocate a lot of capital to fewer sponsors in a programmatic fashion. Mega REPEs can be similar but by virtue of having say US offices (and regional), I feel there is a little less sponsor focus and more long-tail return focus; and local focus.
And one more thing, 10-year holds (longer term).
Thanks for confirming, that's been my experience with these REPE allocators. I am not playing down their role but I think too many people just look at the REPE label without knowing exactly what they are getting into. I also think that in the long run, it will be pretty hard to justify the double fees given that a lot of pension funds have built the in-house capability. I only have second hand knowledge of pays at a couple Canadian pension funds; although the pay is a bit lower (call it 20-25% at mid level), the work life balance is incredibly lucrative.
20-25% of what?
Total comp. The base figures that I hear at pension funds are actually higher than mine. However, bonus is lower and no carry at these pension funds. I can only imagine that the difference will grow larger over time. However, we are still talking about a significant income level that will certainly put a late 20's to early 30's guy in the upper 5% household income while working 40 hours a week on average.
The term I’m familiar with is dis-intermediation: the bypassing of intermediaries which REPE allocators are one of them. This is where the source of the funds invests directly with the sponsor. One promote (not double).
You’ll especially get to the double promote convo with funds from Asia, since they do it all (are active, not passive). Anyways I digress.
The hard trend is towards more dis-intermediation. You see that everywhere from real estate brokerage to hedge funds vs mutual funds vs index.
I think it ebbs and flows. Direct investments can be sexy but mistakes happen and pull back happens. I think with Calpers for example. I’ve been to the “Source” (the investment office of a large pension) and waited in the lobby. To my right where some youngish folks with their pitch deck for some tech idea. I was invited to share my industry thoughts, but when it came to direct investment, they didn’t do that.
I think there will be more dis-intermediatation but it will ebb and flow. The Canadians (and I’d say Commonwealth counties including Australia - I’ve talked to Australians) have been comfortable investing in English speaking countries and US based global CRE firms. I think that relationship and the ability for US based firms to then open markets, is a symbiotic relationship.
That said REPE is shrinking in my opinion (not as fast as HFs), but the private markets, illiquid and long tail of real estate, relationship based, and unique nature of CRE will create opportunities for the best REPEs. Enough value can be created.
For some reason Canadian has good timing. Maybe they are near the US but are somewhat counter-cyclical. Good for them.
Not to hijack this thread, but is this consensus generally also true for the investment teams of other real assets in Canadian pensions, like their infrastructure investments?
CPP in particular is one of the largest LP investors anywhere in the world. They were a huge partner with Westfield and have many different asset classes besides retail. They are run out of their Toronto offices, but primarily operate out of NYC and are ran like a US investor in most senses. Truly dont think it would be bad to work for someone like them with the exposure to so many different GPs, but like others have said: its mostly passive, so the ability to run deals yourself are minimal and it comes down to partner calls and DD requests mostly. Kind of boring if you ask me...
Friend In Toronto Is A Manager For Cppib In Re (5+Yrs Exp) And Has A 130k Base + 70%(Target)-120%Cap Bonus. Another Buddy Works In Their London Office And He's Pulling £325k (Also Manager) For 60-80 Hours Per Week
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