There is a wrinkle developing in the overall theme of depressed buyout markets, and especially difficult exit conditions. And it’s hardly a positive one.

According to news reports, leading pension funds which used to be stalwart independent executors of buyout transactions are now pulling back from direct investment and pursuing more partnership deals with buyout firms. Higher borrowing costs have also reduced the allure of direct investment deals.

Canada’s Caisse de dépôt et placement du Québec has already launched a strategic plan to lower its private equity exposure to 18% while reducing the share of direct investments in this tranche of its US$342.4 billion portfolio from 75% to 65% amid concerns that it had been investing too much and selling too little.

The Financial Times reported that another Canadian fund, the $192.7 billion Ontario Teachers’ Pension Plan, is looking to build out from its core direct investment strategy through increasing emphasis on partnerships and co-investment deals.

Meanwhile, Eric Haley, head of buyouts at the $96.27 billion Ontario Municipal Employees Retirement System will be leaving at the end of the year following revisions to the fund’s private markets strategy, including a wind-down of direct investments into Europe and more partnership deals.

Co-investments at least allow pension funds to avoid paying the usual high fees to private equity firms. Conceivably, buyout firms handicapped by both a difficult deal environment and a $1.6 trillion mountain of dry powder may also be ready to offer better terms to get partners onside.

In some respects, it seems a pity that pension funds, natural long-term owners of assets – and long the funders of the lavish fee structures of buyout firms – should have to pull back from direct ownership of assets. Many of the large Canadian funds in particular have built up impressive expertise and capabilities. All the same, they still have to accept the dynamics of the asset class like any other private markets investor.

But results are not guaranteed even where pension funds are partnering with private equity firms to execute deals. Consider the $2 billion bid for British healthcare property developer Assura launched in February by the UK’s Universities Superannuation Scheme in partnership with US private equity giant KKR.

The pension fund and Assura had been in partnership since May 2024 to invest in the National Health Service and other medical infrastructure, but the Assura board still unanimously rejected the bid. The fund announced that it would not participate in any other bid for Assura, while KKR is reportedly pursuing the asset independently.

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