This interview with one of Canada’s largest public pension plans, the Ontario Teachers' Pension Plan (OTPP), explores what's been behind the growth in private market investments, the difference between co-investment and co-underwriting, the role of direct investors in asset operations, picking between domestic and international opportunities, where future growth will come from, plus tax treatments of private market investments.
David Grana: What's been behind the growth in private market investments over the past years?
Jane Rowe: We have been doing Private Equity (PE) investing for over 25 years. Our first private equity investment was in 1991, and from the very beginning, we have run a dual track process here at Ontario Teachers’. We’ve invested as a Limited Partner (LP) in PE funds, and we’ve also done direct investing as shareholders into private companies. As of December 2016, we had some $7-8 billion at work in PE funds around the world, and another $18-$20 billion at work directly through our portfolio companies. Typically, when we invest direct into portfolio companies, it falls into two categories: where we invest either as minority co-investors, or as control investor. An element of the direct investing approach that is a little bit different from some of the other folks out there is in what we call 'long-term equities'. This is where we have looked at private investment opportunities and have decided that the company may be a little bit lower risk, have a better cash yield, and we decide to become majority shareholders; typically, we have gone in on our own with the desire to hold the investment for a long time.
David: Is there a difference between co-investment and co-underwriting?
Jane: I would describe co-investment, or a syndicated co-investment opportunity, as one where you take a small piece of a larger deal which may or may not come with a board seat or observer rights. A co-underwritten opportunity is where you and your partner have identified an opportunity and jointly decide to go after it. Essentially, you are both inside the kitchen and working on the opportunity together. With the former, you are coming in after the company has been identified, the investment thesis has started to be developed, the due diligence is well underway, and maybe you are only looking at some of the summary reports. With the latter, you are digging deep with your partners from the beginning. Currently, with over 25 years experience, we are much more focused on trying to dig deep from the beginning with some of our partners.
David: Does this mean OTPP participates in a more operational role within each of those companies that they have a majority holding over?
Jane: With our ownerships, we are minorities in some companies and majority in others. It really depends. The more we own of a company, the higher the likelihood that OTPP will be more engaged. In such cases, our portfolio management team will be making sure that we have a fairly disciplined approach to value creation and thinking about what the blueprint should be for the company once we become one of its key owners.
David: As a Canadian pension plan, do you find domestic opportunities more appealing, or do you feel that there are better opportunities internationally?
Jane: In the private capital space, only around 10-12% of our assets are actually located in Canada, leaving the vast majority outside of the country. A majority of our global exposure is in the US, along with substantial exposures in the UK and Europe, and smaller but growing exposures in Asia.
David: How do you analyze each opportunity and where do you see a great deal of the growth coming, from a regional standpoint?
Jane: We do a top down analysis, looking at which geographies might make sense for us over the next couple of decades. However, we will do a bottom up analysis on each opportunity before we make them a part of our portfolio. In our global approach, we opened an office in London in 2007 and in Hong Kong in late 2012. We executed our first co-underwritten deals for India and China out of our Hong Kong office in 2017. It takes a while to start to deploy capital in our distant geographies. Historically, we had always had fund partners in Asia and had done some co-investments. With the establishment of an office there, we have been able to take it up a notch. We have done other deals in Hong Kong with other partners like DTZ in Australia, which we did with TPG Asia.
David: Do you find that having international offices helps you to better to understand the local market?
Jane: Absolutely. And that is why we really wanted to open our own office in Asia. Being located at the intersection of Yonge and Finch here in Toronto is not exactly a global hub, but it gives you a good appreciation of what is taking place in the market. When you think about illiquid investments, it is really important to have really good partners and people from your own team who understand and are located in that market.
David: Are there certain industry verticals that OTPP focuses on specifically?
Jane: The team here is quite large, with over 75 professionals in the private capital team. About 10 of them work look for private equity funds around the globe for us to potentially work with, and another 10 work in the portfolio management team, which is where we do value creation and performance monitoring, along with helping companies think about talent, governance and strategic planning. The remainder of the team are on the direct investing side. Some of our team members are in Hong Kong and London, but the majority are here in Toronto and are divided into six sectors: healthcare, consumer retail, industrials, financials, oil, gas and energy, and telecomm, media and technology.
David: Of those sectors, are there some sectors that are showing better opportunities?
Jane: All of our sector teams are thinking about the landscape that they operate in and are trying to find good opportunities for us to put capital to work. In any given year, some sectors may shine a little bit more than others, but we are looking in all of our primary sectors consistently for places to put capital to work so that we can feel we are doing a good job for the teachers of Ontario.
David: What are some of the challenges facing private market investments at the moment?
Jane: Thematically, I feel that valuations seem very high at the moment. Finding the right companies to add to your portfolio can be quite challenging. We are continuing to be an active participant in the market, both as a buyer and seller, although we have been more focused on selling over the past year. That may continue as current market conditions persist. OTPP has ownership in almost 60 companies, and a lot of what we are doing at the moment is helping them become acquirers of other businesses, such as tuck-ins acquisitions.
David: Are there any potential implications on US private market investments as a result of the tax bill that was passed at the end of 2017?
Jane: On balance, as an illiquid asset class, it is too soon to tell for certain how all of this will play out over the next 2-10 years. From an investor perspective, the headline number of reduced corporate tax rates in the US is a positive development, but it is a very lengthy bill with a lot of complexities, so it is still too soon to understand all of the implications.
David: What have been your thoughts around the importance of women in the institutional finance industry in light of your recent recognition by the Women in Capital Markets group?
Jane: There are a few of us who were around when Women in Capital Markets was formed a couple of decades ago. We are starting to see a shift in thinking in the next generation of really talented women coming up through the ranks. When you look at an organization like OTPP and where we have come over the past 20-25 years, it has really been remarkable. We have a lot of talented, senior women in our executive ranks, with two of us heading up asset classes. Like all financial institutions and asset managers, we continue to challenge ourselves on whether we are doing a good enough job in attracting and retaining the next generation of talent, We all can appreciate that having more diversity on our teams is a good thing, whether by gender or ethnicity. We are global investors and diversity in and of itself is important to have top performance. We continue to challenge this and to acknowledge the challenges in having the right composition of teams for the next decades.
David: Thank you for sharing your views on this subject.
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