LP interview: Ontario Teachers' Pension Plan

While many North American pension funds are interested yet wary of direct investments in Asia, Canada's Ontario Teachers' Pension Plan (OTPP) has emerged as a keen exponent. In the first half of 2012 alone, it teamed up with Hastings Fund Management to acquire a 50-year lease on Sydney Desalination Plant for $2.35 billion and then bought a 9.9% stake in Korea's Kyobo Life Insurance for $398 million.

OTPP and Unitas Capital were reportedly in the running for Singapore-based industrial fasteners manufacturer Infastech in July, but lost out on the $850 million deal to Stanley Black & Decker. OTPP and Unitas previously acquired New Zealand's Yellow Pages Group for $1.59 billion in 2007, only for the business to flounder, resulting in a total write-off.

Clearly the pension plan wasn't deterred by this failure. In recent years, it has completed 70 direct investments globally as well as 48 co-investments and 44 mezzanine investments. More are expected to come.

Jane Rowe (pictured), head of Teachers' Private Capital (TPC), tells AVCJ that she sees "the current pockets of dislocation in the capital markets [globally] as creating some compelling opportunities." She cites as examples recent acquisitions of software companies in North America and the purchase of a majority stake in sports apparel group Helly Hanson in July. (The Sydney Desalination Plant investment falls under real assets rather than TPC.)

Strong performer

OTPP is an impressive global performer among LPs. Net assets reached an all-time high of C$117.1 billion in 2011, largely thanks to an 11.2% one-year return on the plan's investment portfolio. The benchmark was 9.8%. Private capital - which incorporates direct investment, co-investment and GP commitments - fixed income and real assets - real estate, infrastructure and timberland - were the standout categories.

Specifically, TPC investments totaled $12.2 billion at the end of 2011, up from $12 billion a year earlier. The return was 16.6% compared to a benchmark of -0.2%. OTPP's annual report said the "extraordinary value-added performance" reflected a significant number of monetizations and valuation adjustments with the portfolio holdings.

TPC also redeployed approximately $1.7 billion of capital across three direct investments, two commitments to new funds and reinvestments with five funds.

Impressive performance notwithstanding, OTPP acknowledges that despite increased contribution rates and reduced benefits to and from the 300,000 active and retired Ontario teachers it serves, persistent low interest rates and changing demographic trends continue to adversely affect the plan.

"The result is a preliminary $9.6 billion funding shortfall as of January 1, 2012," Jim Leech, Teachers' president & CEO said in a statement. "Our liabilities, i.e. the projected cost of funding future pensions, continue to outpace our projected asset growth. Accordingly, we are working with our sponsors, the Ontario Teachers' Federation and the Ontario provincial government, to advise them on various options to close this gap at a reasonable cost."

Accrued pension benefits reached C$162.6 billion by the end of 2011, exceeding net assets by C$45.5 billion. The deficit was C$6.1 billion larger than the previous year, despite an encouraging portfolio performance. In this context, the increased focus on direct and co-investments, both domestically and in emerging markets, is understandable.

TPC's relatively aggressive approach is also apparent in its commitments to GPs: there is a willingness to anchor spin-out funds, putting up a significant portion of the overall corpus.

According to AVCJ Research, Temasek Holdings and OTPP together accounted for about half of the $1.5 billion MBK Partners fund, Michael Kim's debut independent vehicle after leaving his position as president of Carlyle Asia Partners. OTPP re-upped for the successor fund, which closed at $1.6 billion in 2009.

OTPP and Temasek were also two of three anchor investors in FountainVest China Growth Capital Fund I, set up by former executives in Temasek's China team. The vehicle closed at $950 million in 2008 and each of the anchors has re-upped for fund II, which is expected to reach $1.35 billion.

More recent additions to the TPC portfolio are PAG, whose $2.4 billion debut fund is managed by Weijian Shan, formerly Asia head at TPG Capital, and India-focused Kedaara Capital, which was formed by alumni of Temasek and General Atlantic.

Selection criteria

Rowe says the key criteria in manager selection are a superior track record, good chemistry between the partners and the ability to demonstrate "a certain elegance in their offering." TPC's portfolio includes a mixture of global, regional and country funds. It tends to back the latter in large economies such as China that offer a wider variety of investment options.

"We also hope to be an important investor for our GPs, and that this will end up driving opportunities for us to be able to partner with them in making larger investments," Rowe adds.

TPC eschews third-party support, conducting due diligence and negotiating investment terms on its own. This is in keeping with a wider strategy of building up substantive in-house teams of investment professionals across the alternatives categories that are capable of operating successfully without intermediaries. Balance is the key - retaining a healthy mixture of direct, co-investment and GP interests.

As to the viability of this strategy, OTPP can point to a core portfolio that has generated an IRR of 19.3% since the early 1990s. According to a 2011 report by CEM Benchmarking, the world's leading authority on pension plan benchmarking, of the pension plans its studies around the world, OTPP had the highest 10-year total fund and value-add returns.

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• Topics
• LPs
• North America
• OTPP
• LPs
• Canada