Q&A: OTPP's Nicole Musicco

Q: What do you look for from potential portfolio GPs in Asia?

A: If you look at our developed markets portfolio, the funds tend to be $1-3 billion size and sector-focused. We can take our internal team and be another smart set of eyes for the GP, and that has worked well. So in Asia Pacific a big piece of it is who the partner is, the types of deals they are going to do, and whether our expertise overlaps nicely with theirs. If all we are is just another LP with a big check book then we are unlikely to see co-investment. We look at who the other LPs are and whether we offer a differentiated solution because we have expertise in the sector or because the style of investing requires an LP that can be more agile and innovative. If the GP is looking to be a bit more creative about structure, maybe about how long they hold the asset for, we can play a larger role.

Q: What is the optimal fund size for you in Asia?

If all we are is just another LP with a big check book then we are unlikely to see co-investment

A: When we first came out here in a larger way in the early 2000s, we were either carving out teams from larger groups of setting people up in new shops. The funds tended to be under $1 billion because that is what the market could handle. Fast forward to the next era and the funds were in the $1-3 billion range, and we were comfortable with that. Now when we see funds raising above that it makes us nervous because we know there is lots of dry powder sitting on the sidelines - not only with traditional GPs but with sovereign wealth funds and groups like us. That tends to lead us in the direction of funds raising $1-2 billion where there average check size is going to be $150-250 million and we think we can provide a co-investment solution that is meaningful enough in size. If a GP needs to fill a $200-300 million equity hole - which would be rare - our hope is they put in $200 million and we put in $100 million.

Q: How small a check could you cut for a co-investment?

A: We have tried to stay at a minimum of $75 million. In the context of a $20 billion private equity portfolio and a very small team in this region we are cognizant of that return effort. In this market specifically, where there are probably more platform-play investments, we definitely see a scenario in which we write a smaller check today knowing that we would be adding more capital over time. Maybe you start with $50 million and grow that to $100 million or $200 million.

Q: And OTPP has to be a co-underwriter in a deal, there is no interest in downstream syndication...

A: In 2006-2008 we participated in some syndicated deals and we weren't happy with the results. There was a pretty clear connection between returns and being at the table, using our own eyeballs and our own insights, versus just writing a check. One of the reasons we sent a team out here was to establish relationships with local partners - and those partners could be anything from an entrepreneur or family through to a very local GP or sovereign. Our strong preference is to work with GPs we have on hand. If we aren't working with a GP we like to work with a local partner that we have got to know over time.

Q: What happens if you have co-investment opportunities with two different GPs that are bidding for the same asset?

A: We often get calls from one or two groups so we are extremely diligent about not putting ourselves in an awkward position. When we get a call from one group we refrain from taking calls from others. We don't always win but it's more important to us to maintain that trust with our partner than to switch horses. If it's a large deal we like to know it's coming to market and so in most cases we have already done our homework so if and when the call comes we know who we think is best positioned to win, who has the most expertise, and who would need us as a co-investor. When you go through that framework you would be surprised how quickly it makes our life easy.

Q: You said OTPP is interested in GPs that are looking to be a bit more creative about structure. To what extent do you see that creativity in Asia?

A: We are starting to see more variety. A lot of investments that were underwritten as 3-5 year deals haven't necessarily been exited and our message to our GPs is maintain discipline and make sure you are getting value creation done. Don't just look for a quick exit because we need the capital back. LPs are becoming more sophisticated in making sure we set our GPs up for success. There is dialogue at the LP advisory committee level as to whether there is value to be had if we are a bit more patient. In other instances we find a way to work with the GP, help them get a realization at a valuation that makes sense, and then together with other LPs that are interested, take the company to the next stage.

Q: Do you expect more LPs to build in-house teams in the region so they can do things like this?

A: If you have the right governance and compensation systems in place, it comes back to having the autonomy and agility to get deals done. Without a combination of those three things it's really hard to have the 20-year record we have in private equity. I think more groups will build in-house teams but it is not an overnight exercise.

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• Topics
• LPs
• Fundraising
• People
• Buyout
• LPs
• Co-investment
• Fundraising
• OTPP