In summary, the ratings provided by PIAC respondents to the fourteen barriers contained in the CLMPC-PIAC survey underscore the significance of the structure of private capital markets as a general impediment. Privately-placed debt and equity of above-average risk implies substantial information and transaction problems that can be overcome only by long-term pension expenditure on specialty managers, internal oversight and technical adjustments of different kinds. For most PIAC respondents, the costs seem great and entail much uncertainty. This is especially true if there is no belief in superior, risk-adjusted returns at the end of the day. Most managing fiduciaries believe the decision would also prove a difficult sell to trustees.
The CLMPC-PIAC survey found little variance in ratings by size of pension fund or chosen style of asset management. Concerning the former, it was quite clear, however, that the largest pension funds placed the most emphasis on structural barriers in the marketplace, probably because of historical experience (i.e., middle and venture capital market environments in the 1980s) or because they have been grappling with such issues more recently. A second observation is that pension funds with assets of $1 billion or less clearly feel constrained by size. Fiduciaries in smaller-size funds also appear to be considerably more sensitive to pension governance and legal implications, perhaps because these have not been addressed to date.
If structural issues are at the crux of limited pension participation, then responses must invariably feature innovations in Canadian market organization, relationships and practices that help compensate for certain inefficiencies. In particular, convincing strategic arrangements must be found for directing pension assets emphasizing the use of co-investment, partnerships, pooling vehicles and other syndicates that house expertise and experience in such markets as merchant banking and venture financing. Not only must investment infrastructure yield the earnings expected of pension trustees and managers, it must fully account for their fiduciary obligations and other requirements as long-term suppliers.
It is possible that Canada may benefit from emulating certain innovations in American (and, in selected examples, Australian) markets for venture and non-venture private equity and mezzanine financing. This includes the fund-of-funds model of pension syndication and advisory and agency professional infrastructure available to institutional investors, partnerships and SMEs. Gatekeeping intermediary functions - both as advisor and agent - may provide specialized support of particular help to pension fiduciaries. Finally, many of the "best practices" advocated by pension funds and recently introduced to most limited partnerships/pools in the United States are instructive. These and other initiatives go to the heart of many of the barriers highlighted in the CLMPC-PIAC survey.
Many of these issues are technical and pertain to the "nuts and bolts" of operating in private capital markets. Most alternative models discussed here are based on mainstream principles and procedures for establishing clear signals and disciplines that will convince governing and managing fiduciaries of the reliability of cost-adjusted and risk-adjusted returns. If introduced, they offer the promise of greater maturity in even comparatively small markets like those of Canada. This, in turn, may open up new financial opportunities for suppliers. In particular, pension funds may be allowed more scope to balance assets with liabilities in the long- term and diversify.
Creative organizational strategies utilized for overcoming barriers are also crucial to realizing key Canadian economic and social goals. This is as much true for pension investment activity that is driven exclusively by the prospect of maximizing financial returns, where collateral benefits may be incidental, as it is for American ETIs and comparable Canadian asset-targeting models, where collateral benefits are planned as a subset of earnings. Ultimately, both kinds of asset allocations must find effective means for negotiating inherently inefficient private capital markets.
With regard to ETIs, et al, an additional point should be made. In the United States, ETI programs concentrate on eliciting certain collateral benefits, such as employment, housing and local development (see What's an ETI?), by identifying a capital market gap that has led to under-investment in the first place. Several ETIs have long and efficacious track records in capturing both financial and non-financial returns, the former measured against conventional market benchmarks. This usually has occurred because a given ETI program has married its economic and social investment goals with proven operational techniques adapted or adopted from mainstream capital markets.
Several high profile American ETIs and ETI-like programs referenced in this document - such as the HIT and BIT of the AFL-CIO (see Pension Funds and Real Estate Investing), the venture capital pools of PERA of Colorado (see Pension Funds and Venture Investing) the debt financing initiatives of SWIB and the Texas Growth Fund and ULLICO's Private Capital Fund (see Pension Funds and Middle Market Investing) - attest to this strategy in practice.