Although there are some advantages to IB in Canada, it’s almost always better to start a finance career in the U.S. or U.K.

I can already hear Canadian readers screaming and proclaiming the benefits of free healthcare, so I’ll acknowledge that Canada does have some advantages over the U.S.

You could also argue that finance careers there beat most other careers in Canada, especially as a recent graduate.

But when you consider the recruiting landscape, compensation, and exit opportunities, Canada comes up short in most areas.

Let’s start with a quick industry overview before moving into the more controversial areas:

Investment Banking in Canada: Top Banks, Locations, and Industries

Canada is significantly smaller than the U.S. in terms of population, economy, and capital markets, and this one difference explains everything else.

It means the capital markets and banking systems are less developed and that the average deal size and volume are both lower.

It also means fewer investment banking positions within the country, making recruiting more challenging.

The Big 5 Canadian banks – the Royal Bank of Canada (RBC), the Bank of Montreal (BMO), the Toronto-Dominion Bank (TD), the Bank of Novia Scotia (Scotiabank), and the Canadian Imperial Bank of Commerce (CIBC) – tend to dominate domestic equity and debt deals.

You could also include National Bank to make it the “Big 6.”

M&A activity, as measured by dollar volume, is more of a mixed picture, and the bulge bracket banks tend to do very well because of many cross-border deals.

The Big 5/6 Canadian firms all have centers in Toronto with regional offices in places like Calgary, Montreal, and Vancouver.

Among these banks, most people would say that RBC is the strongest one internationally, followed by TD or BMO.

RBC’s M&A and BMO’s M&M (Metals & Mining) groups are usually viewed as the “best teams,” or at least the best-known ones internationally.

The bulge bracket banks also operate in Canada, but they tend to be more active on M&A deals – especially larger, cross-border ones – and on larger debt and equity offerings (over $1 billion).

Since the domestic capital markets are smaller, larger Canadian borrowers often issue in USD or other currencies to market to a larger investor base.

The standard “ranking” of BB banks is similar; GS, MS, and JPM still tend to be viewed as the top firms.

The elite boutiques have a presence in Canada, but they’re less active than in the U.S.

You’ll see the likes of Evercore, Rothschild, Lazard, and Greenhill advising on deals, along with Perella Weinberg Partners (PWP) via its merger with Tudor, Pickering & Holt (TPH).

Then there are the Big 4 investment banking / corporate finance groups, which tend to focus on much smaller deals, such as ones in the middle-market range and below.

Interestingly, many U.S.-based middle-market banks do not have offices in Canada, which leaves the market to other firms.

You could make a long list of Canada-specific middle-market and boutique investment banks, but a few names include Agentis Capital, ATB Capital (FKA: Altacorp), Canaccord, Capital West, Casgrain, Cormark, Desjardins, Eight Capital, Fort Capital, Haywood, iA Capital Markets (Industrial Alliance), Laurentian Bank Securities, Macquarie (operates more like a boutique), Maxit Capital (mining and merchant banking), Paradigm Capital, Peters & Co (energy), Research Capital (FKA: Mackie), Stifel FirstEnergy, and Stifel GMP.

Investment Banking in Canada: Toronto vs. Calgary vs. Montreal vs. Vancouver

Toronto is the biggest financial center, but it still has fewer IB jobs than places such as New York, San Francisco, or Chicago in the U.S.; it might be on par with LA.

After Toronto, either Montreal or Calgary tends to have the most deal activity, but Calgary is highly cyclical because of its oil & gas focus.

Montreal, like Toronto, covers diversified industries, but caters to companies in Quebec.

And Vancouver has a mining and forestry focus, with some bankers covering other companies that happen to be based in British Columbia.

Besides the industry focus and languages (French in Montreal), other differences between these locations and Toronto include:

• Office Size: The regional offices are all smaller, with ~10-15 up to a few dozen people in each, so there are fewer new hires.
• Target Schools: Students at “target schools” place well country-wide, but in some of these locations, you’ll also have a good shot coming from schools that are in the “semi-target” category, such as the University of British Columbia (UBC) [PMF] and Simon Fraser University (SFU) in Vancouver.
• Advancement: It can be more difficult to advance in regional offices because the teams are smaller and there’s less turnover at the mid-to-top levels.
• Deal Flow: It tends to be less consistent due to the focus on specific industries, regions, or company types in these other offices.

Investment Banking in Canada: Recruiting and Interviews

The IB recruiting process in Canada is similar to the one in the U.S.: it starts with online applications and HireVue interviews and proceeds to in-person interviews if you perform well (unlike EMEA, there are no assessment centers).

They ask similar interview questions, but some technical questions may differ because Canadian companies follow IFRS rather than U.S. GAAP.

As a specific example, lease accounting differs substantially under IFRS, so accounting questions about this one could come up.

Bankers still look for the same qualities in candidates: high grades, a well-known university, finance internships in your first and second year, and strong technical skills.

The main differences are:

• Timing: While the IB recruiting timeline has moved up in both the U.S. and Canada, it’s still a bit slower in Canada, with the Canadian firms starting and finishing a few months after the earliest start dates in the U.S.
• Number of Positions: Each Big 5 bank might hire a dozen or so Analysts for its Toronto office each year, and if you add the other cities, the bulge bracket banks, and the boutique and middle-market firms, there are maybe ~100 – 200 new IB Analyst hires across Canada each year.

I can already predict that someone will argue with this number in the comments, but the order of magnitude is correct (i.e., the number of new IB Analysts hired each year is closer to 100 than 10 or 1,000).

• MBA Recruiting: This is much less developed, so it’s harder to make a career change. Most Associates are Analysts who accept promotions.

Most of these differences sound negative, but there is one positive point: traditionally, getting a work visa in Canada has been easier than in the U.S. because there are more immigration pathways.

Investment Banking Target Schools in Canada

Western University (Ivey) and Queen’s University (Smith) are the top two schools for investment banking in Canada.

After that are McGill (Desautels), Waterloo (stronger for S&T / markets roles), and the University of Toronto (Rotman).

Below them are others such as the University of British Columbia (specifically, the Sauder Portfolio Management Foundation [PMF] program), Wilfrid Laurier, the University of Calgary, York (Schulich), HEC Montreal, the University of Alberta, and Concordia.

You could say these are “semi-targets” or “targets for specific locations.”

Why is Recruiting into Investment Banking So Hard in Canada?

Many people complain online about the difficulty of recruiting for IB roles in Canada.

It is more difficult to win offers there, but the main issue is that there aren’t that many new hires each year.

If you consider the top few schools, there might be ~1,500 graduates each year, but not all of them are interested in banking, and not all of them stay in Canada.

Perhaps one-third of this total – a few hundred candidates – target IB roles in Canada.

Source: The Ivey HBA employment report cites 575 graduating students, with 12% accepting IB roles, so it’s reasonable to assume that some multiple of this 12% applied for these roles.

Students from semi-target and other schools also compete, so the annual pool might be ~500 – 1,000 candidates for ~100 – 200 spots.

With these numbers, the success rate could be anywhere from 10% to 40%, but something in the middle (20 – 25%) is probably closest to the truth.

These are not terrible odds, but they’re modestly worse than the ones in the U.S. and U.K.

Investment Banking in Canada: Salaries and Bonuses

The general pattern here is:

3. Banks tend to pay similar base salaries and bonuses to the U.S., but in Canadian dollars (CAD) rather than USD, which means a 20 – 30% discount depending on FX rates.
4. Sometimes, the absolute numbers in CAD are also lower because Canadian banks tend to match pay increases in the U.S. more slowly (e.g., they might be 6 – 12 months behind).
5. And to make things even more confusing, some U.S.-based firms, such as Evercore and Greenhill, do pay in USD, in which case compensation is about the same as in the U.S.

If you go by 2022 investment banker compensation numbers and apply this 20 – 30% CAD/USD discount, it’s roughly $110K – $190K USD for Analysts and $225K – $410K USD for Associates.

I don’t have specific numbers for MDs and other senior bankers, but bonuses are likely lower because deals tend to be smaller.

The Lifestyle and Hours in Canada

Now we arrive at one bright spot: on average, the hours and lifestyle are slightly better in Canada.

Deal flow is lower, transactions tend to be simpler, and financial sponsors (private equity firms) usually account for a low percentage of all M&A deals (~20 – 30% range).

There’s also less travel because many client companies are concentrated in or near a few major cities.

It’s still investment banking, so don’t expect “normal hours,” but you’re less likely to get crushed by 90-100-hour workweeks in most groups.

The average week at the junior level might involve ~10% fewer hours than an equivalent group in the U.S. (e.g., a Big 5 Canadian M&A team in Toronto vs. M&A at a bulge bracket in NY).

Investment Banking in Canada: Exit Opportunities

The main exit opportunities in Canada are:

1. Move into private equity, usually at a middle-market or smaller fund (with a few seats at the mega-funds and the large domestic firms).
2. Join a pension fund in a direct investing role.
3. Join a corporate development team at a normal company or move into another industry role.
4. Accept an Analyst-to-Associate promotion.

There is very limited hedge fund activity in Canada, so hedge funds are not a common exit option.

This might sound like a reasonable set of exit opportunities, but the problem is the smaller market size.

If there are ~100 – 200 new IB Analysts hired within Canada each year, there are not even close to that many new private equity and pension fund positions.

Firms might hire a few dozen new Associates, so ~70% of IB Analysts will stay in banking or move to a corporate role.

Within private equity, there are some large, independent funds like Onex, Brookfield, Catalyst, Birch Hill, and Altas.

However, all of these – except for Onex and Brookfield – are closer to mid-sized firms in the U.S. if you judge them based on AUM or average deal size.

There are also many lower-middle-market (and smaller) firms, such as DW Healthcare, Fengate, Forum, Georgian, Inovia (more of a VC), Northleaf, NovaCap, Sagard, and TorQuest.

As with smaller firms in the U.S., compensation tends to be lower at these firms, and advancement is sometimes tricky if the firm is extremely small and Founder-led.

Outside of the dedicated private equity firms, the biggest PE investors are the pension funds: Canadian Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ), Ontario Teachers’ Pension Plan (OTPP), British Columbia Investment Management Corporation (BCI), Ontario Municipal Employees Retirement System (OMERS), and a few others.

Of these, CPPIB and OTPP are the most active in private equity – by far – and tend to compete with the mega-funds for large deals worldwide.

A long time ago, pension funds operated more like private equity funds of funds, but they have built their direct investing teams over time.

Besides the relatively few positions, the other problem with exit opportunities in Canada is that compensation tends to be lower than at similar U.S. firms, even though cities like Toronto are quite expensive.

Salary and bonus numbers differ between direct PE firms and pension funds and depend on the firm’s AUM, but the broad range for Associates is $150K – $350K CAD.

If you ignore the “CAD” part, it doesn’t seem that much different from compensation in the U.S., but it’s a 20 – 30% discount with that factored in.

Also, pension funds pay less than firms like Onex and Brookfield, and (lower)-middle-market PE firms pay less than pension funds.

Pension funds pay lower bonuses and do not offer carried interest, so the pay is also lower at the top levels.

So, do not expect to see the top-end of this range unless you’re at one of the top two firms.

One Final Note: If you want to recruit for PE and other roles outside of Canada, you’ll have a better shot if you work at one of the top U.S. banks.

For exit opportunities within Canada, one of the Big 5/6 or other domestic firms is fine.

Investment Banking in Canada: Final Thoughts

I don’t think investment banking in Canada is terrible, but it is worse than starting in the U.S. or U.K. if you can win sponsorship there or you’re already a citizen or resident.

The compensation is lower than in the U.S., the industry is smaller, and there are fewer exit opportunities.

There are some benefits, such as slightly better hours and easier work visas in some cases, but I’m not sure these offset the negatives.

So, if your goal is to maximize compensation and exit/advancement opportunities, go to the U.S.

If you want a better work/life balance, you’re fine with reduced compensation, and you want broader exit opportunities, go to the U.K.

And if you have other priorities, such as family/personal motivations, and you want to earn a lot even if you’re not maximizing your compensation, maybe investment banking in Canada is just fine.

It could always be worse – at least you’re not in Australia!

The post Investment Banking in Canada: Promising Career Launchpad, or Wintry Wasteland to Avoid? appeared first on Mergers & Inquisitions.

No!

Despite comments from previous interviewees about how “small” the industry is, buy-side roles do exist.

And if you want more hands-on experience, private equity in Canada might just be a better bet than pension funds – as our reader today found out:

Breaking into Investment Banking in Canada

Q: You know how this works. Your story?

A: I did an undergraduate degree in Canada at a non-target school, became interested in IB late in the process from a friend I met on a study abroad, and then completed a Master’s degree.

After the Master’s program, I won an investment banking Analyst role at a “large bank” (Think: A bulge bracket or Big 5 Canadian bank) and worked there for a few years.

I liked the experience, but I decided to move into private equity for all the usual reasons: Work/life balance, more interesting work, and the chance to get some “skin in the game.”

Q: Canadian interviewees have said that the investment banking industry there is small and incredibly difficult to get into.

How did you beat the odds?

A: I’m not sure if I have any magical tricks, but the most important points for me were:

• Prepare with Humility – There are so many resources out there that you have no excuse not to get the easy questions right. But, with that said, I found that a little humility went a long way when it came to answering the questions.

You can’t walk in and act like you know everything just because you’ve read several interview guides; if you show too much bravado, interviewers will grill you.

• Perfect Your Story – It must be both concise and memorable. I used a study-abroad experience for my “memorable” point. And I spent a lot of time cutting my story down to its bare essentials while still making it interesting and giving examples of my work ethic and desire to be there.

If your story goes on for more than 300 words, that’s too long! Most people tend to ramble and fail to explain how the bank and group relate to their long-term goals.

• Use Deadlines at Networking Events to Maximize Your Results – Banks usually host drink/appetizer events right before or after final-round interviews. At these events, everyone surrounds the senior bankers, and it’s tough to get their attention.

So, I used a simple strategy: I found an excuse to leave the event early, and I used that excuse to speak with senior bankers on my way out.

For example, sometimes I said I had to run to catch a flight because of an obligation the next morning, or I said I had to leave for an exam.

That trick allowed me to speak with everyone at least once and ensured that more bankers would remember me.

Private Equity Recruiting in the Great White North

Q: Thanks for those tips.

What was the private equity recruiting process like?

A: To be clear, I can only describe the process *I* went through. You should not take my story as a universal commentary on all private equity recruiting in Canada.

My process was less structured than the one you’ve described for New York-based roles; it was closer to off-cycle recruiting.

The main Canadian firm that uses a structured process is Onex, the largest non-pension PE fund in the country.

PE firms here rarely hire recent graduates, and they typically expect you to know how to model, write memos, and make investment recommendations from day one.

That limits the pool of candidates to bankers, pension fund professionals, and a few Big 4 professionals.

Recruiters also have less power here, so many firms fill positions through referrals. Independent networking can be tremendously helpful.

At the firm I interviewed at and eventually joined, I met every member of the team in groups of two or three on different days, and I went through four interviews total.

They focused on my deal experience in banking, my story, my leadership experience, and the “Why private equity?” question.

I did not complete a case study or modeling test, but that is the exception rather than the rule.

Q: Yeah, it sounds like it. If someone interviews at your firm, what should he/she expect in the case study?

A: Typically, we invite candidates to our office, give them a CIM from a company we’ve already exited, and ask them to build a 3-statement model for the company.

We ask them to justify each assumption and draft a few PowerPoints slides recommending for or against the deal and explaining their reasoning (think of it as a mini-Investment Memo).

Your modeling ability is important, but equally important is your ability to think through a business, its strengths and weaknesses, its growth opportunities, and its risk factors.

You may occasionally get a “take-home case study,” but they tend to be less common here.

Q: On that note, what is the private equity industry in Canada like?

A: If you exclude the pension funds, there are fewer than ten private equity firms with over $1 billion in AUM.

The U.S.-based mega-funds barely have a presence here: A few have a location or two (e.g., Blackstone and Apollo in Toronto, or KKR’s former office in Calgary), but most have no offices in Canada.

Some domestic Canadian PE firms include Onex (and ONCAP, its middle-market group), Brookfield, Birch Hill, TorQuest, Hillcore / Abacus, ARC Financial (Energy focus), TriWest, EdgeStone, Catalyst, Ironbridge, Azimuth (Energy focus), and Cordiant.

Those are some of the larger firms, but there are dozens of smaller firms as well.

If you count the pension funds as private equity, firms like Teachers’, CPP, and OMERS also have a big presence in the industry.

Many firms in Western Canada focus on energy and natural resources, but the rest of the country is fairly diversified.

There might be around 200-300 PE deals in the country each year, with foreign firms responsible for almost half the deals; 80% of those foreign firms are U.S.-based.

It’s difficult to generalize deals, but a few high-level differences include:

• Less Leverage – If the average Debt / EBITDA for leveraged buyouts is 5-6x in the U.S., it might be 3-4x, or even less, in Canada. There are also more restrictions on cash flow sweeps and additional debt incurrences, and covenant-lite loans aren’t the norm.
• Lower Purchase Multiples – Deals here tend to see less competition, so multiples are not bid up as high as in other markets; with that said, multiples have been creeping up as more foreign firms invest in Canadian businesses.
• Friendlier Environment – It feels like there’s a more collaborative attitude here and less of a “corporate raider” mentality. This last one is my own impression from working on deals in the industry, so I don’t know if there’s hard data to back it up. Also, it may not be true at the larger funds here.

Source: Torys and their articles on Canadian private equity (PDFs from previous years have more data as well).

Q: Great, thanks for that summary.

Are there any issues with currencies and FX risk since the CAD has fluctuated so much against the USD historically?

A: It depends on the firm – if I had to guess, I would think that many PE firms do not hedge currencies.

Some of the larger firms with more North American or global investment mandates have raised funds denominated in USD, as they expect to see more U.S. deals than Canadian deals because of the market size.

Pension funds are comfortable with USD exposure since they invest worldwide and have so much capital to deploy.

Q: OK. And on that note, you’ve compared private equity with pension funds several times now, but what are the advantages of working in private equity rather than pension funds?

A: The main ones, at least from my perspective, are:

• Skill Set – You will learn more about how businesses operate if you go to a middle-market, operationally-focused PE fund, as I did.
• Responsibility – Teams tend to be smaller at PE funds, so Associates get much more responsibility, and junior team members play bigger roles.
• Advancement Opportunities – Since people tend to stick around at pension funds for a long time, it may be a bit easier to advance in PE.
• Compensation – You would earn $150K – $200K as a first-year Associate at a pension fund, but $175K – $250K at a middle-market PE fund or $300K+ at Onex.

(NOTE: All compensation figures are in CAD and as of 2017.)

These points are not universally true – a lot depends on your group, your firm, and your ability. The list above includes what I perceived to be the advantages of my current firm.

I also chose my firm because it had just raised a new fund, so I knew the team would be active.

If you’re interviewing around, always check when the firm last raised a new fund or when they are planning to raise a new fund, and be very cautious if the firm is struggling or has struggled to raise capital.

Do not leave an IB job for a PE firm that has no capital available and that cannot raise a new fund.

Q: Thanks for sharing those tips.

So, what are your long-term plans?

A: I’m happy where I am right now, so I don’t anticipate any major changes.

Many Canadian firms let you stick around after your first two years (vs. the two-years-and-out model in the U.S.), so I might just do that.

Q: Thanks for your time!

A: My pleasure.

—

Want More?

If you liked this article, you might be interested in reading about The Private Equity Fund of Funds.

The post How to Move from Investment Banking to Private Equity in Canada appeared first on Mergers & Inquisitions.

Whenever I publish an article on Canada, it seems to attract controversy.

But there’s one thing everyone can agree on: The investment banking industry there is small, and it’s tough to get in even if you attend one of the top universities.

But there’s also a nice “Plan B” option: Pension funds.

They’re huge, and they don’t necessarily require full-time IB experience.

Our reader today took advantage of this strategy to break into finance in Canada “through the side door”:

Northern Exposure: Through the Side Door into Finance

Q: You know how this works. Your story, please?

A: Sure. I went to a top university in Canada, majored in finance and economics, but had almost no interest in or knowledge of investment banking until my last year in school.

It was too late to have a shot at IB by then, so I accepted a loosely related, middle-office job at a utility.

I thought I’d have to work for a few years, get an MBA, and then apply for Summer Associate roles at banks, but I got sick of my job, quit, and moved to an emerging/frontier market within a few months.

I had some background and family in this emerging/frontier market, and through massive amounts of networking, I won an internship at a well-known, global investment bank there.

The internship experience was terrible because there was hardly any deal activity; I worked insane hours on minutiae since there was so little real work.

But it allowed me to write “Investment Banking Analyst – [Well-Known Bank]” on my resume, which is all that mattered.

I moved back to Canada and instantly got better results from networking with banks and pension funds.

I went through multiple rounds of interviews with several bulge-bracket banks but ultimately accepted an offer at one of the top pension funds in Canada, where I’ve been working for the past few years.

Q: I like your strategy.

How difficult is it to break into IB in Canada? Previous interviewees have argued that it’s anywhere between “extremely difficult” and “impossible.”

A: It is difficult, but not impossible.

The top few undergrad business programs here (Ivey, Queen’s, and a few others) have around ~1,500 graduates per year, and at least a few hundred of them will be interested in IB roles.

Not all of them apply solely in Canada; some go to the U.S., U.K., or other places.

Once you add in the semi-target and non-target schools, it’s likely a pool of ~500-1000 candidates seeking IB roles each year.

But the Big 5 banks here don’t hire that many people each year – each bank might hire a dozen or so in its main Toronto office and up to 90-100 throughout North America.

In total, there may be ~100 new IB Analysts positions in Canada each year, and perhaps more than that if you also count the boutiques, smaller banks, and regional offices.

So, your odds of winning an IB role here are not spectacular, but they’re not that much worse than in other places.

I didn’t care about these odds – I focused on myself and started setting up coffee meetings with dozens of bankers and buy-side executives.

The fact that Canada is a small market also works in your favor: Once you get “plugged in,” you get to know everyone, and everyone knows that you’re looking for something and starts passing opportunities onto you.

Q: I see. I’m surprised the pension funds were interested in you since you only had an IB internship in an emerging/frontier market…

A: It’s more common to work in IB for two years and then move to a pension fund, but when I began recruiting, many pension funds were on hiring sprees. Moreover, I had an interesting “story.”

Once you have “Investment Banking Analyst” on your resume, you don’t necessarily need multiple years of experience to move over.

Q: OK – so, what types of candidates are pension funds usually seeking?

A: They like to hire bankers who have 1-2 years of experience and groom them as “long-term investments.”

It gets tougher if you have 3-4 years of experience because you’ll be perceived as less “malleable.”

Some funds, such as CPP (Canada Pension Plan), also hire straight out of undergrad.

It’s possible to break in as a consultant or Big 4 professional, but it’s tougher than moving in from banking.

Many Canadian pension funds are increasingly poaching staff from PE firms and large banks in the U.S., often targeting Canadians who went to New York and now want to return home.

Q: Thanks for explaining that. What should you expect in the recruiting process and interviews?

A: Except for CPP, the largest fund, most firms have unstructured processes that may take a long time – often ~3 months – to complete.

It’s the opposite of mega-fund PE recruiting in New York.

The questions and case studies are similar to what you’ve covered before: Know valuation, DCF, and LBO models, know your deals, and form an opinion on your deals from the perspective of an investor.

Besides the long-and-dragged-out process, the biggest difference is that you MUST fit in with the culture at pension funds, which is quite different from traditional IB/PE culture.

Canadian pension funds always claim that they’re “nicer” than traditional PE funds, which is a big part of how they win deals.

So, if you go in acting like the stereotypical a#$#$#e banker, you will not win offers.

The Pension Industry in Canada: Mining for Gold in Saskatchewan?

Q: Thanks for explaining that.

What is the pension industry in Canada like, and why has it grown so much in recent years (2010 – 2016)?

A: All the largest pensions have cash surpluses, so they’ve become more interested in direct investments in companies, infrastructure, real estate, and other assets in recent years.

The first to go direct was Ontario Teachers in the 1990s; they realized they could build an internal team to do direct investments instead of paying 2 and 20 to outside funds.

In the 2000s, PSP (Public Sector Pension Investment Board) started doing the same thing, and then OMERS and CPP followed.

The pension funds here have become some of the biggest and most active bidders on infrastructure assets in Europe, the U.S., and Australia, to the point where 25-30% of the top 20 private equity deals worldwide each year involve Canadian pensions.

There’s an example here for deals in 2015: Of the top 10 global PE deals, 3 involved CPP.

These funds are also becoming more institutionalized, and many have 35-person infrastructure teams chasing deals all over the world.

In past decades, they used to follow simple 60/40 equities/bonds strategies.

Q: Wow. And how do you approach deals differently from the PE mega-funds? Or do you compete against them on deals?

A: It’s a bit of both; we’ve partnered with firms like CVC, MBK, and KKR before, but we also compete against them on certain deals.

Our big advantage is that we don’t have hurdle rates. A firm like KKR enters these situations with an 8% hurdle rate, which immediately rules out certain deals.

That’s not necessarily good for our performance, though, since we might be taking on extra risk and not pricing it in effectively.

Pensions are increasingly allocating money into highly illiquid assets because they can afford to hold assets for 15-20 years, which normal PE firms could never do.

Our focus has also shifted to emerging and frontier markets because infrastructure assets have become too expensive in developed markets.

Just as one example, a Canadian consortium acquired the London City Airport for 30x EBITDA in 2016, outbidding a Chinese company and another Canadian consortium.

A normal PE firm would have to be crazy to pay 30x EBITDA for a mature asset, but we can afford to do such things.

Q: Yeah, that amount of leeway helps…

What other advantages do you have over traditional PE firms?

A: Another big one is that we’re non-taxable – in Canada – which provides an immediate boost (we still pay taxes on foreign operations and earnings).

We also spend a lot of time structuring deals to minimize the local tax burden.

Leverage typically stays at the asset-level, but we’ll rarely, if ever, let portfolio companies or assets go bankrupt because of the reputational risk.

PE firms’ main advantage is that they can use certain strategies not available to us, such as acquiring a company and then then selling off all its assets (we’re too nice for that!).

Q: Thanks for explaining all that.

Are there major differences between the largest pension funds?

A: The biggest difference probably lies with Caisse, the Quebec-based fund, because they’re required to invest something in the local province, even if such deals are not financially justified.

Aside from Caisse, the type of work, deals, and people are similar at the others, and they tend to be partners more than competitors.

The main differences are size and risk appetite.

A fund like CPP with over $300 billion in AUM is so big that it can afford to go into markets like China and India, acquire riskier assets, and hold assets for longer periods.

Some Boards also represent pension holders more closely than others, in which case they tend to be more risk-averse and favor brownfield assets over development deals.

Q: It sounds like Canadian pension funds are poised to take over the world.

What are the downsides?

A: First, it is very tough to advance because professionals in middle and upper management here barely ever leave.

That’s partially because there aren’t many other buy-side opportunities specific to Canada.

There are a few other large private equity funds and alternative asset managers, like Onex and Brookfield, but the PE and HF opportunities are dwarfed by those in the U.S.

You might advance more quickly if you’re at a pension fund that starts a new group, such as private debt, direct lending, or secondaries, and you move over right away.

But otherwise, it will be a long and slow grind to the top.

Another disadvantage is that compensation is significantly lower than what you would earn in IB or PE.

CPP tends to pay well since they hire more people out of traditional private equity funds, but many of the others pay bonuses of around 40-50% of base salaries.

In IB and PE, your bonus is often 100% of your base salary.

Since base salaries are also a bit lower, you’ll likely take at least a 30-40% pay cut if you move over from a large bank or private equity fund.

That gap becomes even bigger at the senior levels because there is no carry.

Senior team members who left for places such as BlackRock sometimes ended up earning 10x higher total compensation.

Q: Those are some pretty serious downsides.

On that note, what are your long-term plans?

A: If I can find the right opportunity, I might move to an infrastructure private equity fund.

But I’m not in any rush to move. Like I said before, there aren’t that many traditional buy-side opportunities here, and I’m pleased with the job for the most part.

Q: I see. Is there anything else important you want to add?

A: Don’t underestimate the CFA! As you’ve noted before, it is more respected here, and Toronto has a high “CFA per capita” figure.

You don’t “need it,” but it can be a differentiator if your academic record and work experience are similar to those of other candidates.

Q: And on that note, I think we have to finish up before my head explodes.

Thanks for your time!

A: My pleasure.

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