Why PE requires a 'multi-dimensional playbook' for pension funds

Canadian pension funds are embracing a multi-dimensional approach to private equity, one that leans more heavily on partnerships than ever before.

John Cho, head of KPMG Canada’s private capital team, sees a significant shift underway in how Canadian pension plans are rethinking private equity. The increased competitiveness of the asset class is pushing these institutions to evolve beyond traditional investment strategies.

He highlights that today, institutional investors have more ways to participate, including co-investments and the growing secondaries market, which involves purchasing slices of already established portfolios.

“Canadian pension plans are rethinking their private equity strategy, in many cases, largely because the environment is so competitive,” Cho said.

For pension funds to succeed in this environment and continue generating alpha, he believes fund managers need a “multi-dimensional private equity investment playbook.”

While direct investments remain a cornerstone, whether pursued solo or through co-investments he notes a growing interest in the partnership model. By aligning with general partners (GPs) like Blackstone or KKR, institutional investors can gain preferential access to deal flow.

“If you invest in a GP, it often comes with a condition that you expect to see deal flow and or an opportunity to invest alongside a Blackstone private equity deal with your own capital,” he explained.

These partnerships do more than broaden access; they also allow investors to tap into the operational expertise and value creation strategies of large GPs. Cho pointed out that these firms often come with large operating partner and value creation teams.

All this has led to Canadian pension plans, most recently, Ontario Teachers’, rethinking their approach to private equity. Instead of a purely direct investment model, they’re now leaning into partnership-based strategies, co-investing with GPs like Blackstone or KKR.

The logic, Cho suggests, revolves around access to deal flow, value creation support, and alignment with experienced managers.

He stressed that these are not new concepts. He pointed to CPP Investments who has long operated under a hybrid model, with “a multi-faceted private equity program.”

Canadian pension funds typically allocate to private equity through three channels: direct investments, private equity funds, and co-investments but the latter allows them to invest alongside private equity managers without paying fund fees.

Cho disagrees, however, with the idea that partnership models are some bold new frontier.

“It’s not new. It’s just that there’s more focus on it today than on a pure direct program,” he said.

He also highlighted a partnership approach to private equity programs also provides a diversification benefit where fund managers can invest in private equity in more ways. Pension funds ultimately benefit from the excess returns generated by private equity but mitigate risk by investing across multiple PE strategies, he explained.

Venelina Arduini, co-leader of alternative investments at Mercer Canada, underscores the ongoing importance of manager selection in private equity investing, particularly for pension plans.

Choosing the right manager, she explains, remains “a very, very important consideration” as it can significantly shape both returns and access to opportunities.

“Partnerships with an experienced manager may lead to more co-investment opportunities and insights that are shared to the plan sponsor,” she said, highlighting a key benefit for pension funds looking for deeper involvement and visibility.

Arduini also highlighted that private equity continues to offer pension plans unique access to sectors with high-growth potential - the kind of opportunities that are simply not available in public markets.

Cho explained that institutional investors are under pressure to beat the market while balancing risk. Private equity, with its potential for excess returns, has traditionally offered that edge.

Pensions need to reshape PE strategies individually

So what does a modern, winning private equity strategy look like for a pension fund? Cho insists that entirely depends on the pension plan.

“That’s probably the million-dollar question,” he said, noting that crafting an effective playbook depends heavily on internal factors such as mandate, liquidity needs, and organizational strengths.

He explained that pension plans with active liabilities, who manage both investments and payouts, will need an even greater focus on liquidity, than those with investment-only mandates, such as CPP Investments or PSP.

Beyond the mandate, competitive advantages also play a critical role. If a pension plan has a strong presence in specific geographies, it may be able to capitalize on local insights to make smarter investment decisions.

“If you have boots on the ground in certain geographies, in particular developing countries, then you have more of an edge,” Cho noted.

Operational capacity is another key consideration as some funds may choose to build out internal value creation teams, while others might prefer to enhance existing talent or lean on external advisors.

Cho stressed that flexibility and self-awareness are crucial.

“You need to think about where your strengths are and what your mandate is today,” he said.

Looking ahead, Cho expects even more evolution. He pointed to the buildup of portfolio companies nearing exit points.

“They need to increase the velocity of exits to recycle capital and exercise more discipline on exits to avoid degradation of investment returns by overextending hold periods or missing optimal exit windows” he said. “There’s going to be an opportunity for them to execute on their strategy and for more capital to flow in the private equity ecosystem.”

However, Arduini ultimately made it clear that the partnership model isn’t a universal solution. Because while it can offer mutual benefits like consistent capital for managers and privileged access for investors, she cautions that it should be evaluated on a case-by-case basis.

“Whether a partnership model is suitable really should be considered on a stand-alone basis,” she advised.