SELF-STARTING LPS

Teachers' Private Capital, the principal investment operation investing on behalf of 250,000 teachers in the Canadian province of Ontario, has made a name for itself as a high-end private equity investor. The group, which runs a C$4.5 billion (£2.9 billion; €3.6 billion) investment portfolio, is partner of choice of some of the world's most successful general partner groups, who rate it both as a fund sponsor and, crucially, as a co-investor too.

It's not just its pension dollars that GPs like about this Toronto-based operation: Teachers', led by industry veteran Jim Leech, is known as an astute investor with a proven ability to add more than capital to a deal.

One important determinant to the group's reputation is that it will only support an investment proposition where the perceived fit is absolutely perfect. If it is, the pension is prepared to commit big time. This was graphically demonstrated by a recent funding event in Europe, where Teachers' saw a gap in the market that it believed no incumbent managers were qualified to fill.

The recent example of Teachers' self-starting approach is Park Square Capital, the brandnew €1 billion subordinated debt fund run by Robin Doumar, the banker formerly in charge of European mezzanine at Goldman Sachs. Unveiled in October, the fund ranks as the biggest unleveraged pool of intermediate capital in Europe.

The fund's arrival on the European scene is noteworthy for a number of reasons. No other entity has stated its intent to invest in European big-ticket LBOs only, and no one else appears capable of writing cheques of up to €200 million per deal, which Park Square says is part of its strategy. Moreover, its deep-pocketed investors have already signalled that they will make available even more capital for co-investment as and when the right deal comes along.

But what really makes this fund stand out is that it wasn't actually its manager who first came up with the idea. For Park Square is in fact the brainchild of Teachers'.

It was Teachers' who approached Doumar with a blueprint for a big-ticket mezzanine machine they wanted him to run. They also took the idea to fellow founding investors Caisse de Depot et Placement du Quebec and Partners Group of Switzerland, both heavy weight private equity investors in their own right. (At the time of going to press, a fourth institution joining the LP group was still considered a possibility, according to sources close to the situation.)

When the project went ahead, Teachers' and the Caisse committed €350 million each. Partners is currently organising a feeder fund to sell part of its interest in Park Square on to its asset management clients.

In addition to putting up the cash, the investors are planning to leverage their many intimate relationships with Europe's LBO elite to help Park Square find investments. Teachers', which for example has provided some €800 million of capital to European blue chip BC Partners, can reasonably claim to know most of the relevant firms well, as can the Caisse. Both institutions have been active in Europe since the early 1990s, having engaged with European GPs long before most US institutional investors began to make such connections.

To further bolster the network, the Canadians wanted a European partner in the syndicate and chose to bring in Partners. All three LPs will sit on Park Square's investment committee and intend to actively source deals. Factor in Doumar's own considerable experience and network, and it's hard to see the fund being absent from the negotiating table when any major buyout requiring a slice of mezzanine is being put together.

With backers like these, Doumar himself presumably didn't take long to get comfortable with the idea of leaving Goldman's captive vehicle. That said, Park Square's limiteds insisted on various LP-friendly terms: Sources say Doumar will be receiving a below market rate management fee and carried interest. But that seems a fair price to pay for a ready-made €1 billion pool of capital and the prospect of some hands-on – and competent – strategic support.

The birth of Park Square Capital is a telling example of how seasoned private equity investors are thinking about how to extract best value from the asset class. In so doing these LPs are helping to transform it. Teachers' for one has done it before and clearly is determined to do it again. The group is currently grooming a new venture group, although Leech won't reveal where in the world this is being done. Whether in Europe or elsewhere, somewhere out there another lucky manager is receiving the Teachers' treatment and should open for business soon. We'll keep you posted.