PEI: Many firms in Asia claim they create value. How do you find out if they actually do?
We would probably probe them and ask: ‘Do you have network of advisors, industry experts, former or current CEOs that can challenge you on parts of [the strategic plan]? Do you bring in consultants or sit down with management teams and actually go through what this company will look like in an ideal world the next five years? What are six important levers to pull to generate more value in these holdings?’ We’re doing that for all our investments. We would also talk to the owner or entrepreneur and challenge our own reps who are sitting on the companies’ boards to walk us through what they’re doing to create value in the company. [Value creation] is more nascent in Asia. But the private equity funds that prove to have long-term sustainable returns are the ones disciplined [in] value creation matters.
Asia has also lagged behind in embracing ESG principles, something that OTPP clearly values very highly. How do you get around that mismatch?
We think a strong ESG focus makes you a better investor and brings better returns. People sometimes challenge us on that. But we believe that if you think about the ‘E’, for example, you think about how to be energy efficient; how to use less water in a process; how to reuse and recycle. As you become more disciplined on that, you create more opportunities for higher returns. One example to crystalise this point is [that] of KKR – I’ll give attribution to a GP here. They have a fleet of trucks for one of their retail investments. By ensuring those trucks were no longer idling but actually shut off when not delivering goods, [it] saved them something like $70 million a year. That may have started as an ESG initiative, but actually it makes strong business sense.
Canadian LPs are very active in Asia and have a reputation for strong sector expertise. Do they have more flexibility to invest than their counterparts in other countries?
We have an excellent governance structure. Our board is made up of financial executives. They have delegated investment authority to the investment staff from the beginning – which was over 20 years ago. They knew it was important that in order to be successful, [OTPP] had to make sure they attracted and retained the right talent. So we have autonomy, and we have investment units and retention tools that ensure we are competitive in the marketplace. It’s a very different model [from] the American [pension plan] system.
How would you define OTPP’s attitude to risk?
Private equity is the highest-risk asset class within our pension plan, but we try to be disciplined. You can’t actually avoid risk. The very first private equity deal we made, we lost money on. The board could have said at that time: `Forget about private equity and focus on more liquid asset classes’. But they didn’t; [they realised] that sometimes you have to stumble before you [can] walk properly. We still make mistakes, but not too many of them. On balance, private equity has been a wonderful-performing asset class for us, and we’ve developed expertise in it. Our track record over 20 years – [averaging] 19 percent returns net of all fees – is an awesome track record for a pension plan.