Current Issue of ai5000 Looks North and South: From Canadian Pension Plans to Investing in South America

The third issue of ai5000, available online at ai5000.com, takes a close look at the sharp divide between South America 's worthwhile and eminently avoidable investment markets. The new issue also examines why Canadian pension plans enjoy a more efficient model for private equity investing than their U.S. counterparts.

In "The Good, the Bad and the Tiny," reporter Nick Lord argues that South America's investment markets fall into three easily identified categories, including markets that are simply too small to attract investors. The other two groupings include markets that benefit from sound national economic policies and others plagued by dismal central policies.

Of the latter, Lord writes that the "epidemic of nationalizations that spread from Chavez's Venezuela has now infected Ecuador and Bolivia; while Argentina's default on its international debt is unresolved eight years after the fact." He explains how the countercyclical fiscal and spending policies of all members of this group ensured that they had insufficient capital to stave off a crisis when it hit.

Lord applauds the more prudent and farsighted policies of Brazil and Peru. He notes that domestic consumption in Brazil "holds hands with the commodity boom under a beneficent economic regime to produce conditions that are making Brazil the hottest investment destination in the world."

Editor in chief Kip McDaniel contrasts the different approaches taken by Canadian and U.S. pension plans in regard to private equity investments. He reports that Canadian pension plans have built internal alternative investment teams that have put billions of dollars to work. Meanwhile, many U.S. public pensions continue to be encumbered by lengthy and complicated due diligence exercises as they seek to select appropriate private equity limited partnerships.

McDaniel argues that political influence and blame avoidance are the primary reasons the U.S. cannot and will not apply the Canadian self-directed model. The large Canadian funds basically run as stand-alone entities, and can manage money solely in the interest of current and future beneficiaries. "In contrast, public funds in the U.S. often get beleaguered by issues outside of pure fiduciary responsibility, which makes it impossible as well as inadvisable for an internal team to run private equity," he comments.