OTPP looks to GP partners for ‘three Es’ on direct investing

The Canadian pension seeks efficiency, education and economics from its GP relationships, says head of private capital Jane Rowe.

When the C$194 billion ($148 billion; €130 billion) Toronto-headquartered Ontario Teachers’ Pension Plan works alongside its GP partners to gain direct exposure to private equity investments, it’s looking for ‘the three Es’: efficiency, education and economics.

Speaking at a private capital event hosted by Bloomberg in New York last week, senior managing director and head of private capital Jane Rowe explained that for every 100 transactions looked at, an investor may “go deep” on around 12, “go really deep” on four or five and win one or two.

“Working with our GPs, hopefully we’ve at least stopped having to spend a lot of time looking at deals 100 down to 12, so it’s a bit more efficient for us,” she said.

OTPP also looks to work with GPs that will help to “make us smarter in a sector or geography”, delivering the second “E” of education.

The savings on management fees and carry in relation to the amount of capital put to work by being a co-investor and co-underwriter on a transaction delivers the third “E” of economics.

“That’s really helped us generate returns,” she said.

Over the 27 years OTPP has been investing in private equity, the team has generated 19.7 percent on average per year net of management fees, carry and internal costs, Rowe said.

Fellow panelist Patrick McCloskey, founder and managing partner of family office-backed private investment firm Aeterna Capital Partners, said his firm’s motivation to invest directly was having more transparency and input around what’s owned and being able to manage liquidity, as well as better economics. Success in direct investing comes down to dealflow, he said.

“You can set up shop and put a flag in the ground and say you’re a direct investor, but you’ve got to get up and generate the dealflow.”

The third panelist, Ian Charles, a partner at secondaries firm Landmark Partners, said the relationship between LPs and GPs today is “so different than it was a decade ago”.

The top 100 GPs globally have raised 65 percent of the capital in the asset class, and last year, 34 percent of the capital raised in private equity went to ancillary products from those 100 firms. What’s more, the number of active private equity firms has been growing at between 10 percent and 12 percent for almost 20 years; last year, that number went down.

“You have a consolidation of capital among the GP side underway, and most LPs are aware of it,” he said. “They’re fighting each other like crazy to get access to those top 100 names.”

For their part, LPs are actively managing their portfolios today “in a way that they wouldn’t have 10 years ago”.

Both Rowe and McCloskey said knowledge sharing among the limited partner community had a big role to play.

“It would be naïve of us to think that we could have a deep understanding of a market in Asia or in Europe stand-alone, so it’s important for us to have a network, it’s important for us to have fellow smart investors. And if they’re LPs working with the same GP, that’s awesome for us,” Rowe said.

“It’s a very competitive industry out there and I think the pension plans and the sovereign wealth funds do want to make sure that we’re thinking about things in a manner that hopefully none of us is being overly naïve.”

McCloskey added that family offices tend to be under-resourced from a human resources perspective, so knowledge sharing is a good way to plug the gap. “We believe in strength in numbers too. Groups like ours, we’re pretty under-resourced from a human resource perspective and that’s on purpose, as are many other family groups. The capital’s there, so we share a lot. The more we share the better.”

“Of the seven investments we’ve made I think we’ve co-invested with other families in all of them,” he said. “When things are going well you can work together to make sure they go well, and when things aren’t going as well you can divide and conquer and figure things out together.”