On this topic, Canadian pension fiduciaries may once again be well-advised to look at recent developments in American and Australian markets for private debt and equity placements where emerging advisory and agency infrastructure is enhancing efficiency. As discussed in some detail above (and in Of Pools and Pooling and What's A Gatekeeper?), an essential function of increasing numbers of reputable professional intermediaries for pension funds, SMEs and specialists managing external pools in these two countries is reliable fact-finding at reduced cost. Even where such intermediaries do not work directly for fiduciaries, their operation can bring greater market-specific intelligence to pension asset allocation decisions. As discussed under Barrier #12, some advisor-agents exist in Canadian merchant banking and venture financing to undertake information-intensive matchmaking of supply and demand.. Another vital source of data are market research firms, such as Macdonald & Associates in the field of Canadian private equity.
Government may also be of service here. In the early 1990s, the federal Administration in the United States established the E2 DataBank as a tool for pension funds and other institutional investors to discover more about the mechanics of high-risk, illiquid investing and its strategic management. Described as an "intersection" between private investment activity and public policy, E2 DataBank has offered clearinghouse data on certain, well-established, pension-supplied asset-targeting models (i.e., ETIs) and analyst or practitioner contacts in the marketplace. Data refer to a "two-test" formula whereby a potential investor may consider the twin goals of risk-adjusted, market-grade returns and benefits to the economy or society.Endnote 143
From a financial standpoint, high-risk private investment activity is justified only if it delivers capital appreciation and returns that are well above-average and assists in diversifying pension portfolios. Most of the time, asset classes such as private equity and subordinated debt, once adjusted for risk, certainly promise higher financial rewards than traditional liquid securities (e.g., stocks and bonds). Pension fiduciaries are aware, however, that volatility can occur and that certain key determinants, such as quality business opportunities and seasoned, skilled investment management, must be present to obtain these rewards over the long haul. Questions about such matters may undermine the confidence of trustees and pension managers in projected performance.
As Figure 18 reveals, a total of 66 percent of PIAC respondents rated this barrier as important (36 percent) or very important (30 percent). Large pension funds gave this barrier even greater emphasis (69 percent important/very important).
PIAC respondents pointed out that there is no broad financial returns "history" for some private capital markets in Canada of interest to pension funds and other institutional investors (as exists in the United States). Of course, this circumstance may preclude informed decisions to enter markets or establishment of benchmarks to measure performance once in. Even if returns are demonstrably superior, some pension fiduciaries remain uncomfortable with possible volatility. Furthermore, returns from liquid, publicly- traded securities have been good enough in recent years to postpone entry into private capital markets. It was also apparent that experience with unsatisfactory returns - merchant banking and venture financing in the 1980s, for example - influenced some answers. A few current pension participants in these markets did not share this view, arguing instead that perceptions of inadequate or unreliable risk-adjusted returns are simply incorrect.
There were very few PIAC member recommendations for overcoming this barrier apart from the already-cited need for better flows of quality, private capital market data to pension fiduciaries. This should include, in the view of some, comparative American information on risk-adjusted returns from privately-placed debt and equity over several decades. In CLMPC interviews with pension managers, interest was also expressed about future development of an accessible, comprehensive database for Canadian venture and non-venture equity markets. Some PIAC respondents also proposed that non-participants might learn more about made-in- Canada returns from the accumulated in-house knowledge of pension funds with an unbroken presence in such markets, such as those associated with the Caisse de dépôt. Thoughts concerning the related issue of measuring long-term investment performance are provided below under Barrier #6.