PIAC respondents argued that most Canadian private capital markets (e.g., venture and non-venture equity) are probably too slight and too immature to generate enough human resources with the skill sets to expedite pension participation of any real magnitude. Once again, the 1980s experience in the middle and venture capital markets informed outlooks as respondents cited poor relations with management professionals responsible for external syndiates. This experience also appears to have created an impression among several PIAC respondents that hard-to-locate professionals of top quality are also too expensive to hire, internally or externally. At the same time, those of lesser quality are difficult to identify in advance of asset allocations. Regardless, an exhaustive, concentrated search for specialists, said several respondents, is consuming of pension time and resources.
One of the duties of gatekeeping intermediaries in Australia and the United States is to assist pension fiduciaries in the process of finding and screening investment specialists and their parntership arrangements based on prescribed criteria. They also assume many of the management-intensive tasks of oversight. This may be a welcome organizational innovation to national private equity markets - even small ones, like those in Canada - where pension participation is constrained only because of limited access to intelligence about existing external options and their intrinsic staff qualities and specializations. Another positive consequence may be more efficient sharing of current Canadian marketplace expertise. For further details, see What's a Gatekeeper?.
Macdonald has also recommended cross-border, co-operative initiatives (north-south alliances) whereby Canadian pension funds can gain access to the knowledge and experience of managers and other agents in markets for private equity and mezzanine financing in the United States. This process may also result in some Canadian emulation or adaptation of market-driven American models and "best practices", as well as ETIs (See What's an ETI?).Endnote 142
As observed many times in this document, an essential distinction between public and private capital markets is the extent to which extensive data exists for pricing in the first and not in the second. Canadian legal disclosure requirements for publicly-traded securities, designed for investor protection, are a big part of what makes this market more efficient, comparatively speaking. Pension fiduciaries can only obtain accurate, regular and up-to- date information about private markets from private sources that collect it directly (i.e., from private, closely- held SMEs) and provide it for transactional or analytical purposes. Market-specific agents who perform this task must incur substantial up-front costs.
As Figure 17 shows, a total of 69 percent of PIAC respondents rated this barrier as important (39 percent) or very important (30 percent). Small and medium-sized pension funds gave it even greater emphasis (74 percent important/very important).
PIAC members clearly stated their concerns about the barrier presented in the absence of private capital market information and the ways by which they are obstructed trying to acquire it. An example cited frequently (by survey respondents and in CLMPC interviews) is long-term, risk-adjusted returns data. This is a crucial point since the entire pension administrative process of examining capital markets prior to allocating assets, directly or to externally-managed pooling vehicles, is dependant on current, quality financial data. This is equally vital to the subsequent process of monitoring and reporting to trustees about investment performance trends. Without a reliable and cost-efficient mechanism for sourcing data, first-time participation may be considered unlikely for many funds. Some PIAC members believe that the relevant data is available - for a price, of course - but is sometimes of doubtful quality.
Information-problematic capital markets require pension expenditure on data-gathering specialists (external or internal) that compensate for this aspect of inefficiency. Much of this information is linked to the competitiveness of private, closely-held SMEs and, hence, is confidential and proprietory in nature and collected predominantly for meeting deal-related ends. For pension funds, the issue is one of how, and at what cost, to obtain it from either specialty managers operating on their behalf or from an independent marketplace service intended to bring demand and supply sides together in an investment transaction.