LP interview: Alberta Teachers' Retirement Fund

Large institutional investors globally are in consolidation mode: They want to reduce the number of GP relationships they have in the private equity space and allocate more capital - through co-investments as well as commitments to funds - to those that remain. For Alberta Teachers' Retirement Fund (ATRF), there is no need to backtrack. Its PE program became active just five years ago and a highly concentrated portfolio was baked into the strategy from the outset.

"We started from a zero base and we had the advantage of building the program in a way we thought would work best, and that was not to invest in too many funds - our target is 15 core relationships," says Rakesh Saraf, head of private investments. "It takes a lot of time to manage relationships. Our job is such that you could be on a plane every week and you have to be at home doing some work as well. We still travel a lot, but half our travel is for co-investments and other new opportunities."

Strategic shift

We are willing to underwrite deal costs, we are willing to step in and work with GPs ahead of them winning the deal – Rakesh Saraf

ATRF was established in 1939 with a C$5,000 ($3,700) grant from the Alberta government, but the genesis of its alternatives program dates back to 2009. That was when the provincial authorities assumed full responsibility for paying teachers' benefits prior to 1992, removing a 70% funding deficiency, and then made a C$1.19 billion loan to cover post-1992 payments. As a result, ATRF's asset base expanded to C$5 billion, and it also saw a significant change in profile.

"The board and management recognized that they didn't really need any cash for the next 20 years because they were managing the fund for employees with post-1992 service, and they were going to get about C$40 million every month in net positive pension contributions. The fund wasn't going to get into negative liquidity until around 2027, so a decision was taken to invest in assets where it could capture an illiquidity premium," says Saraf. He was recruited from Alberta Investment Management to help develop this new strategy.

Having previously invested solely in bonds and public equities, ATRF set allocations of 10% apiece for private equity and infrastructure, and 15% for real estate. The private equity portfolio currently amounts to C$1.2 billion, or about 9%, and is expected to reach C$2.5 billion by 2025. This is in step with projected growth in the overall investment program from the present level of C$13 billion to C$25 billion over the next nine years.

ATRF can write checks of up to C$125 million per manager, but generally aims for the C$60-70 million range. The rationale behind this range is the expectation of how large the fund will be in 2025, not where it is now - so there is unlikely to be an incremental escalation in commitments as the fund grows in size. This is intended to simplify the allocation process in that ATRF will not have to manage multiple existing fund investments of C$15 million when the program has reached a point where C$100 million would be more appropriate.

As of August, commitments had been made to funds operated by 14 different managers, from Cinven and IK Investment Partners in Europe, to AEA and Rhone Group in North America, and to PAG Asia Capital and TPG Capital in Asia. Saraf argues that exposure to around 15 funds is sufficient to address manager risk, but the priority is given to geographical diversification and the number of companies ATRF will end up owning through its fund relationships.

Co-investment play

There have also been 15 co-investments to date, with ATRF able to commit up to C$75 million per transaction. While the infrastructure team has on occasion gone into deals on an independent basis, direct private equity activity is limited to partnerships alongside portfolio GPs, although there is an emphasis on active participation.

"We are willing to underwrite deal costs, we are willing to step in and work with GPs ahead of them winning the deal. We do syndicated co-investments, but we spend a lot of time on pre-syndicated deals, and we have built a team with that capability," Saraf says. His six-person private equity team is led by two senior principals, one of whom is responsible for fund-level relationships (ATRF insists on an LP advisory committee seat) while the other handles co-investments.

However, ATRF has tended to write comparatively larger equity checks for funds in Asia due to the expectation that it will not be a prolific co-investor in the region. Rather, downstream syndication is likely to enjoy greater prominence - a reflection of the group's limited bandwidth in terms of resources on the ground. In contrast to some of its larger Canadian counterparts, ATRF is not under pressure to deploy substantial amounts of capital every year and so at present sees no need to open offices in Asia to serve as a platform for co-investment and exposure to single country managers.

"PAG is a pan-regional firm but predominantly a China play, whereas TPG gives you more varied Asian exposure. We might be a bit light on India so we would consider doing something with an India-focused manager. Things like that are always in the cards," says Saraf.

"When I say 15 relationships, it doesn't stop there, but we won't move rapidly from 15 to 30. When we consider new exposure, the question is always how far do we want to go from 15? The number 15 is written on the board in our meetings as a reminder. We want to be meaningful and deliberate in everything we do."

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• Topics
• North America
• LPs
• Fundraising
• Alberta Teachers’ Retirement Fund
• Asia