Tuesday, February 23, 2016

Ontario Teachers Dumping PE Funds?

Yolanda Bobeldijk of Dow Jones Financial News reports, Ontario Teachers to offload $1bn private equity portfolio:
Toronto-based Ontario Teachers’ Pension Plan is preparing to sell a large private equity portfolio into the market for second-hand fund stakes, according to people familiar with the matter.

The portfolio is worth around $1 billion and consists of fund stakes in a range of private equity funds spread globally, the people said.

The $155 billion Canadian pension plan is speaking to a limited group of potential buyers. The process is at an early stage and no formal bids have been made yet.

A spokesman for Ontario Teachers’ declined to comment on the deal, but said in an emailed statement: "We regularly review our allocation of funds. We remain committed to investing in Europe via GP [general partner] allocation, co-investments and directly."

As the private equity market continues to mature, many institutions have become active buyers and sellers in the secondaries market, which saw an annual volume of around $40 billion in 2015, according to secondary advisory firm Greenhill Cogent.

While just 14% of sellers in the secondaries market last year were public pension funds, they accounted for over 45% of the aggregate dollar volume in 2015, according to Greenhill Cogent’s Secondary Market Trends & Outlook report, which was published in January.

Ontario Teacher’s private equity investments totalled $21 billion at the end of 2014, compared with $14.8 billion at December 31, 2013, according to Ontario Teachers’ website.
After reading this comment, you might be wondering why is the Ontario Teachers' Pension Plan trying to sell $1 billion of global private equity funds in the secondary market where it will sell these fund stakes at a deep discount? (also, how did this leak out?!?!)

A billion dollars represents just under 5% of Teachers' private equity portfolio, so we're not talking about peanuts even if it only represents 0.6% of the entire fund. The official reply was that Teachers regularly reviews its allocations to funds but there might be more to this move than meets the eye.

In particular, Ontario Teachers just stepped on a German land mine and will take a hefty $185 million writedown in its 28% stake in Maple Financial Group whose German subsidiary was shut down for illegal trading activity which was tax evasion or fraud (not sure how serious these charges are but the subsidiary was shut down, which is serious enough).

While Teachers won't publicly comment on this, I'm sure it had something to do with this decision. But that's not the only thing. I think Ontario Teachers is increasingly worried about investing in private equity funds that charge hefty fees (even if it co-invests to bring fees down) and are not delivering the returns they used to.

In my humble opinion, Ontario Teachers is also sending a clear message to the market: it's increasingly concerned about liquidity (or illiquidity) risk and it wants to raise cash in its private equity portfolio to weather the storm ahead.

Ron Mock, Teachers' CEO, already sounded the alarm on alternatives back in April. More recently, we got wind that many large Canadian pensions are cooling on infrastructure, unwilling to bid up prices paid for mature infrastructure assets that are being bid up by global pension and sovereign wealth funds.

But we also recently learned that the Canadian federal government is courting Canada's Top Ten pensions to help it invest in infrastructure and this too may be why Teachers is selling $1 billion in private equity stakes.

Why? Because given the choice of investing in infrastructure at a reasonable cost or doling out huge fees to private equity funds that are struggling for all sorts of reasons, and will continue to struggle as deflation sets in, Teachers is wisely selling fund stakes to bolster its liquidity and have cash at hand to invest in better alternatives in its private and public market portfolios.

In other news, India's Snapdeal raised $200 million led by Ontario Teachers' Pension Plan:
Indian online marketplace Snapdeal has raised $200 million in a fresh funding round led by Canada's Ontario Teachers' Pension Plan, the company said.

The latest fund-raising follows $500 million raised last August in a round led by Alibaba Group Holding, SoftBank Group Corp and Foxconn.

The e-commerce market in India is expected to grow to $220 billion in the value of goods sold by 2025, from an expected $11 billion this year, Bank of America Merrill Lynch said in a recent report.
Not sure about Snapdeal but India is one of the better emerging markets going forward and this could prove to be a great long term investment. But this too might explain why Teachers is selling $1 billion in PE funds stakes as these are significant investments ($185 M here, $200 M there, pretty soon you're talking about real money!).

Again, these are all my observations. I have not spoken to Ron Mock or anyone else at Teachers so take everything I've written above as mere conjecture and nothing based on hard facts (nobody at Teachers will ever discuss this publicly).

Below, Donald Gogel, Clayton Dubilier & Rice chairman & CEO, explains why private equity investments usually thrive during periods of extraordinary volatility and it’s likely we will see this trend continue throughout 2016.

There is a bit of truth to this but I caution all of you, the golden age of private equity is over and just like Ontario Teachers, you better prepare for a long tough slug ahead in this asset class.

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