LP interview: Ontario Teachers' Pension Plan

For Ontario Teachers' Pension Plan (OTPP), investing in Asia presents undeniably exciting opportunities, and with only 8% of its portfolio exposed to the region as of December 2015, it sees plenty of room for growth.

At the same time, though, the LP is determined to maintain its freedom of movement. With assets spread across the globe through fund commitments as well as direct and co-investments, allowing its regional teams to function as they see fit is critical - and one aspect of that freedom is allowing them the freedom not to commit.

"You have to invest when you see the opportunities and not do it as a top-down allocation, this much in China, this much in Korea, and so on," says OTPP CIO Bjarne Larsen. "We believe in the story long-term, but we don't want to make the mistake that we allocate to parts of the world where the teams do not see any good opportunities."

We believe in the story long-term, but we don't want to make the mistake that we allocate to parts of the world where the teams do not see any good opportunities – Bjarne Larsen

As it seeks to maintain this balanced approach, the LP has had to confront a number of challenges. While some of these arose are particular to the geographies in which it seeks to invest, others have been due to the nature of its obligations.

"Every single thing that we do - whether it's real estate, infrastructure, parts of the world - everything starts with the liabilities, the cash flows we have to pay for generations to come," says Ron Mock, president and CEO of OTPP. "Our teachers are going to be around 70 years from now, so we've got to pay them for a long time."

Issues of age

Maintaining the longevity of returns has become more difficult as a result of the changing demographics of OTPP's pensioners. According to the group's 2015 annual report, the number of pensioners aged 100 or above rose from 13 in 1990 to 130 in 2015, and the time retirees are expected to spend collecting pensions stretched from 25 years to 31. In addition, those pensioners are supported by ever-smaller numbers of teachers: the ratio of active teachers to pensioners was 4:1 in 1990, but just 1.4:1 in 2015.

In response to this shift, the LP resisted the urge to rebalance its portfolio toward higher returns by taking on riskier investments. Instead it approached the issue from the other direction, changing the payout structure; whereas previously the plan was required to increase payouts each year based on inflation, since 2010 it has been required to do so only when the fund is running a surplus. If the plan is in deficit, the cost of living adjustment can be reduced or cancelled.

This means the fund can plan for payouts in line with a more youthful demographic, an effect that Mock likens to the film "The Curious Case of Benjamin Button," in which the main character grows younger over time. "We've actually turned this aging demographic on its head," says Mock. "We now operate, from an investment perspective, very much like we would if we had a much younger plan, so it doesn't change a lot of what we're doing from a risk perspective."

While OTPP's solution to its aging client base means it does not have to take on an uncomfortable level of risk, the LP does have a place in its portfolio for investments with higher potential for rewards, particularly private equity. This appetite for exposure was recently evidenced in OTPP leading a funding round for Singapore-based mobile internet and gaming platform Garena at a reported valuation of $2.5 billion.

However, despite its willingness to seek out direct investment, the group's main activity in Asia continues to be through funds. Currently direct or co-investments comprise about a third of OTPP's allocation in Asia, with the rest going to GPs - some of which, including MBK Partners and Kedaara Capital, OTPP had a hand in creating as they spun out from older players. These relationships are therefore of considerable importance to the LP, which sees them as a reflection of its own values.

"We need to stay focused on what we can do and we need to pick our partners carefully, so that we're always aligned," says Mock. "When we get the right culture in a GP, and we know who they are, and we know how they'll perform under tough conditions, and they'll do the right thing, that's very much in our DNA, and I think it's part of the culture."

While PE has been a large part of OTPP's allocation worldwide - making up C$28 billion ($22 billion) of its C$168 billion in global investments as of December 2015, of which C$14 billion was in Asia - another significant part of its asset holdings is real estate and infrastructure, with C$40.5 billion invested worldwide. Infrastructure is virtually unrepresented in Asia, with the exception of Australia, where the LP purchased Leighton Holdings' telecom assets for A$885 million ($670 million) in 2013 and partnered with Hastings Funds Management in 2012 to pick up a 50-year lease on the Sydney Desalination Plant for $2.3 billion.

In this sector, too, OTPP is to a large extent waiting for the market to evolve. While the team says they have noticed opportunities in Asian infrastructure projects outside of Australia, they still need assurances of stability. Since all of its infrastructure investments are done directly, rather than through GPs, long-term protection is a particular concern.

"Even when we look at our investments in Canada or Europe, we need to have the framework right," says Larsen. "The government and the community have to figure out how we can have a long-term regulation framework that's in place for not just the next two years, but for the next 20 or 30 years. And a lot of governments are new to this as well, so they're working on creating that framework."

OTPP has seen progress in this regard, with local governments increasingly reaching out to consult on possible reforms. In these situations, OTPP shares case studies of deals it has been involved with in other parts of the world, highlighting the role that favorable regulatory or tax treatment, or the right kind of partner, played in making their investment successful.

Though infrastructure assets are not a significant part of OTPP's Asia portfolio outside Australia, the group sees the asset class as a defining part of its character. Mock considers the decision to invest in infrastructure, initiated in the late 1990s, to be one of several key innovations that OTPP has introduced to the global LP community. Other landmarks include the establishment of platforms directly operated by the LP and geared toward specific sectors, of which Canada-based real estate investor Cadillac Fairview was the first.

"Operating platforms were a huge innovation, and to this day it continues to be a critical cornerstone," says Mock. "That's why we operate in eight countries around the world with wind farms, solar, hydro, and we build and construct in these platforms, which is a unique kind of thing for a pension plan to be doing."

Innovative approach

The challenges of managing investment assets directly have also left a mark on OTPP. Its hiring, for instance, has become increasingly focused on finding managers with useful sector backgrounds, along with traditional investment professionals. The group's reputation for adding value is an asset in attracting this talent, though recruitment is not easy outside of its core North American markets. Building a network for attracting talent that meshes well with OTPP's culture is one of the priorities of the Asia management.

One of the main differentiating factors between OTPP's Asia team and its operations in other regions has been control. While most of the LP's direct investments in Europe and North America have been for majority stakes, the group has completed few deals of this kind in Asia, a fact that Nicole Musicco, OTPP's managing director and head of Asia Pacific, attributes to the relatively early stage of the market's development.

She expects it to continue evolving to the point where OTPP is able to participate more meaningfully in these kinds of transactions. But at the same time, the lack of a hard allocation from global headquarters means that the team can choose deals carefully and invest only when it has a good enough relationship with a company and its management to be confident its advice will be heard. "Because we don't have to just deploy capital, because we don't have a gun to our heads, so to speak, even in those minority deals that get us excited, we still have effective control," Musicco explains.

As OTPP picks up its focus on Asia's markets, the LP hopes to continue introducing new concepts to the region's investors. One opportunity that it is eager to explore is the chance to help its GPs and portfolio companies in Asia grow their business outside the region.

"This is one of the biggest trends in this part of the market where we can really make a difference," Musicco says. "That's something we spend time making sure our prospective partners understand, that not only can we help you in this region, but we've got this massive portfolio outside of Asia-Pacific. I think there's an appetite to gain some global knowledge."

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• Topics
• LPs
• North America
• Fundraising
• OTPP
• Asia
• Co-investment
• Direct investment