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Side Letter: OTPP’s GP-esque transformation; SEC’s ESG overhaul; Sub line justice

Monday is a public holiday in the US, so we'll return to your inboxes on Tuesday. In the meantime, we have a dive into why Ontario Teachers' Pension Plan now acts more like a GP than an LP. Plus: the US SEC has voted to approve new ESG disclosures and a sub line fraudster that shocked the market has been jailed. Here's today's brief, for our valued subscribers only.

Just happened

A GP by any other name
As the world’s largest LPs grow increasingly sophisticated, some are beginning to behave more like GPs. Ontario Teachers’ Pension Plan is a case in point. The C$242 billion fund was one of the busiest investors globally last year by deal value, deploying C$10 billion ($7.8 billion; €7.3 billion) to private equity, roughly twice its outlay in 2020 and 2019, our colleagues at Buyouts report (registration required). The deployment was a mix of direct and fund investing, however, about 20 direct deals absorbed the lion’s share, 75 percent of which it led or co-led.

Unlike some its peers, OTPP’s proclivity to run deals on its own isn’t better known because it likes to keep a low-profile. “We’re humble Canadians,” Karen Frank, global head of equities, told Buyouts. “We don’t pound our chest. We try to be very sound, very reliable investors who think about what best-in-class looks like and who do a good job.”

In a fiercely competitive industry – GPs had an estimated $1.78 trillion of dry powder as of February – the investor also stands out because it can invest in everything from buyouts and growth equity to structured equity and PIPEs – all independently or with fund partners and other investors. Lacking a fund’s “natural inhibitions” Frank said, OTPP can be an agile dealmaker with global reach. “I tell my team, ‘If you really like the opportunity, find the trade, find the capital or design the kind of capital that goes into that company’.”

As PE re-ups threaten to overwhelm investors and concentrate capital in a small handful of broadly similar mega-funds, LPs with the flexibility to take matters into their own hands may find themselves the envy of their peers. Frustrating environments like these could well prompt others to consider building similar capabilities, if they weren’t already.

If you securitise it, they will come
Last week, Private Equity International reported that Temasek‘s Azalea was giving retail investors the opportunity to climb the risk-return ladder with its latest collateralised fund obligation. The Astrea 7 offering, which has since closed, was 3x oversubscribed, according to a statement this morning. The issuer received S$877 million ($638 million; €597 million) of valid applications for the less risky Class A-1 bonds and $126 million for the Class B bonds from a total of 30,565 and 7,059 applicants, respectively. This equates to about a 3.1x subscription rate for the Class A-1 bonds and about 1.3x for the higher risk and potentially higher-returning Class B bonds.

Our take: the offering is further evidence retail demand does indeed exist for PE-like products, albeit with the caveat that risk appetites so far lean more towards the conservative side.

EU seem familiar to US
Commissioners at the US Securities and Exchange Commission yesterday voted 3-1 to approve proposed rules around ESG-related disclosures designed to combat greenwashing. Carl Ayers from our colleagues at Regulatory Compliance Watch followed the discussion (read his full report here, registration permitting). Here is an excerpt from the article… it will sound familiar to readers with interests in the EU:

“Advisers would have to describe their use of ESG factors, their strategies, methods of analysis and how they voted relevant proxies. The amount of disclosure would depend on the extent of ESG investing by a fund. Three categories would be created: 1. Integration funds (in which ESG plays a smaller part) 2. ESG-focused funds (they rely on one or more ESG factors) and 3. Impact funds (designed to achieve a certain ESG goal).” What’s next? You’ll have 60 days to submit comment on the 362-page proposal document once it is posted in the Federal Register.”

Essentials

Sub line justice
A PE sponsor whose actions revealed fundamental flaws in the subscription credit market has been jailed. JES Capital Management’s Elliot Smerling was sentenced to 97 months in prison and another three years on parole for one count of bank fraud and one of securities fraud, RCW also reported. Smerling fabricated commitments to a fund in order to secure $140 million of sub lines from lenders including Silicon Valley Bank.

Banks such as Silicon Valley – sometimes called “the bank of private equity” – often rely on fund advisers’ words when underwriting loans, though it is fund investors who are ultimately on the hook to cover a default by a fellow investor, per affiliate title Private Funds CFO (registration required). Banks have since added extra safeguards to their due diligence processes.

Always be prepared
As if there wasn’t enough to worry about at the moment, compliance officers are now faced with the reality that hackers are becoming smarter, more lucrative and are rapidly closing in on their businesses. At Private Equity International’s Private Funds Compliance Forum this week, compliance experts gathered to share some of top tips for avoiding cyber near misses. The full report is worth a read, but here are some key takeaways:

  • Audio is not always what it seems. One compliance officer shared an incident where hackers spliced various pieces of audio to create a highly convincing fake phone call, with the aim of swaying members of the firm to perform illegitimate tasks for their LPs.
  • The weak spots aren’t always inside your team. External contacts – for example, investors on a capital call mailing list – could open doors to hackers, no matter how strong your internal cyber infrastructure is. In this instance, two-factor authentication can be a lifesaver.
  • When an attack is successful, the clock starts ticking. Damage control is of the utmost importance following an attack – if LP data is lost, some US states dictate they must be notified within a day or two.

Today’s letter was prepared by Alex Lynn with Rod JamesCarmela MendozaHelen de Beer and Toby Mitchenall.