As discussed in Pension Funds and Venture Investing and Pension Funds and Middle Market Investing, private capital markets to which Canadian pension funds retain some connection have undergone considerable change over the past ten-plus years. Several market analysts and practitioners have testified to stable capital supply trends, increasing expertise and specialization in pools and managers, diversity in investment activity and tools, more sophisticated entrepreneurship and many more sources of returns in burgeoning new industries (e.g., biotechnology, computer products and information technology) or in restructuring traditional ones. In the case of venture financing, evidence of new maturity has been displayed in such high technology regions as the Ottawa Valley where demand and supply matches have clearly increased in quantity and quality since the mid- 1960s.Endnote 151 As noted in From Acorns to Trees, this is also apparent in the increased incidence of specialty or "niche" pools across Canada.
This is consistent with evolutionary trends in deeper and more established American private capital markets. In that country, pension funds have contributed quite significantly to positive outcomes and, at the same time, have made their presence as key suppliers more commodious or favourable to themselves. This has been attained by fiduciary calls for the introduction of organizational and technical innovations from market practitioners, as described under Barrier #1 in relation to venture and non-venture equity and subordinated debt investing. Of Pools and Pooling and What's a Gatekeeper? highlight some of these pension-led initiatives, intended, in many cases, to prevent the repetition of past mistakes. Australian private equity markets appears to be evolving similarly.Endnote 152
There is a widely-held view among Canadian pension fiduciaries, their agents and advisors that fiduciary obligations to plan participants and beneficiaries, by definition, preclude involvement in most private capital markets. Generally speaking, the rationale is that pension investment must be in all respects low-risk if the promise of secure benefits for retirees is to be reliably guaranteed. Sometimes this caution is understandably linked to the constraints imposed by a pension plan's individual funding circumstances and projected stream of liabilities. In some cases, risk aversion is given formal expression in policy strictures against allocations to certain asset classes, such as high-risk, illiquid securities (e.g., private equity).
A total of 47 percent of PIAC respondents rated this barrier as important (28 percent) or very important (19 percent). Small and medium-sized pension funds gave it above-average emphasis (50 percent important/very important).
Several PIAC respondents confirmed that specific aspects of much private investment activity - high risk, illiquidity, return cycles, volatility - can contribute to an impression of unmanage-ability and careless treatment of pension plan assets. As compared to a strategy of sticking with core asset classes, the notion of pension participation in certain private capital markets may suggest to the uninitiated a violation of prudence and fiduciary duty. While this may not be true, said some respondents, tight restriction of overall pension exposure to such alternative/non-traditional assets is certainly justified on prudential grounds. One PIAC member argued that the real violation of fiduciary principles may be neglect of private capital markets and their growing value to diversifying portfolios and sources of earnings in a new economy.
To deal with any misconceptions surrounding this barrier, respondents again recommended supplementary educational materials and programs clarifying outlooks on fiduciary theory and practice in relation to private capital markets. Some also proposed that quality data and analysis about these markets that reaches both governing and managing fiduciaries would be of assistance here (see Barrier #7).