A Fireside Chat With BCI's Head of PE Jim Pittman
Background and BCI Overview:
- Jim Pittman has over 30 years of experience in finance and private equity, with a background in accounting and industry experience as a CFO and COO.
- BCI is a pension fund for unionized employees and government employees in British Columbia and Western Canada, with gross assets under management of $250 billion.
Private Equity Market Trends and Challenges:
- The proliferation of private equity funds (from 3,000 to 16,000) has led to a stuck capital situation, making it difficult for smaller managers to raise funds.
- Investors often opt for larger, well-known managers due to perceived safety and ease of allocation, making it challenging for newer managers to gain traction.
- The industry has become a fundraising machine, with many managers focusing on marketing and investor relations rather than deal-making and sourcing.
What Makes a Compelling Manager:
- Performance is key, with a focus on net returns (e.g., 25% net, 20% net, 15% net).
- Managers should have a clear investment strategy, a strong track record, and a compelling narrative for their fund.
- Investor relations teams are crucial in communicating a manager’s value proposition and building relationships with limited partners.
Red Flags for Managers:
- Managers who inflate their returns or mark their books aggressively may deter investors.
- Lack of transparency and inconsistent performance can raise concerns.
- Asset gathering without a clear strategy or focus can be a turn-off for investors.
Talent Acquisition and Retention:
- BCI looks for individuals with relevant experience, a strong network, and the ability to understand the dynamics of fund investing and deal-making.
- The firm attracts talent from the industry, often from managers looking for a more stable and long-term approach to investing.
Market Outlook and Trends:
- The secondary market will continue to grow, with a supply of around $100-150 billion.
- Continuation funds will become more popular as a way for managers to exit investments without selling at depressed prices.
- Consolidation in the industry is likely, with larger managers acquiring smaller ones to expand their strategies and AUM.
- Fee structures may change, with pressure on public companies to reduce management fees and focus on performance-based compensation.
Conclusion:
- The top tech companies and top private equity funds share some similarities, but the growth dynamics are different.
- The industry may see more concentration and consolidation, leading to concerns about too-big-to-fail scenarios.
- Overall, Jim Pittman’s insights provide a candid look at the private equity industry, highlighting the challenges and opportunities in the current market environment.
Key timestamps:
00:09: Introduction to ION Influencers’ Fireside Chats
00:46: Jim Pittman’s Background and Role within BCI
01:55: Overview of BCI as a Pension Fund
03:33: Expansion of BCI into Private Equity and Infrastructure
03:55: Observation of Trends in the Private Equity Market
06:20: Factors Influencing Investor Decisions in Private Equity
08:23: Selection Criteria for Private Equity Managers
10:14: Focus on Fundraising and Deal Making in Private Equity
12:54: Impact of Transition and Performance in Private Equity
13:33: Red Flags for Private Equity Managers
16:13: Challenges in Building a Global Private Equity Team
16:42: Understanding Fund Dynamics
17:05: Industry Connectivity and Market Trends
17:45: Attraction of Capital and Talent
18:22: Motivation and Risk Aversion
19:51: Verification and Networking
20:17: Trends in the Secondary Market
21:27: Role of Secondary Market in Asset Management
22:52: LPs and GP Stakes
23:29: Continuation Vehicles and Acquisitions
24:24: Anticipated Changes in the Industry
25:05: Fee Structure and Manager Compensation
25:41: Comparison with Top Tech Companies
26:44: Conclusion and Insights
Jim Pittman and I worked at PSP back in the day and just to correct him, he was the third employee in the Private Equity group after yours truly helped Derek Murphy ("Murph") set up that asset class there in 2004 (except he was Derek's direct hire whereas I was shoved in PE initially by Gordon Fyfe to help Murph with his Board presentation and setting up the asset class. I then moved on to asset mix research and also helped Infrastructure set up their asset class).
Anyways, Jim Pittman was Derek Murphy's smartest hire, his right-hand man and when Andre Bourbonnais took over the helm at PSP, Murph bowed out and it didn't take long for Jim to join Gordon at BCI.
That's the way it works at Canada's Maple Eight, if you know the right people, you're taken care of and if you don't, you're left fending for yourself.
Anyway, Jim is a good guy, met up with him for a beer in Montreal a couple of years ago (maybe longer) and he has done a great job at BCI adding meaningful alpha there, developing strong relationships in the mid market space and increasing co-investments with all funds to reduce fee drag.
When he was here he told me bluntly: "Most of my job is managing (strategic) relationships".
Most of the job of any head of PE at Canada's Maple Eight is managing strategic relationships, that's the main reason Caitlin Gubbels was promoted to take over the helm of CPP Investments' massive PE portfolio.
Anyway, Jim now lives in New York City, opening up an office there for BCI where he handles these strategic relationships.
That basically means he has to meet up with top GPs and make sure he reminds them that BCI is looking for significant co-investments on larger private equity transactions as part of a quid pro quo for investing in their funds.
Before I get to the discussion with Giovanni Amodeo, I invite you read some older comments of mine on why Jim Pittman is staying liquid, focused and agile on private equity here and why BCI sold $1 billion of private equity holdings to Ardian here.
You know my thoughts on private equity, things are tough and they're about to get tougher as the industry goes through a major reset in valuations.
Higher for longer has meant transactions are down significantly, distributions are at historic lows while valuations remain elevated and the entire industry is waiting for global central banks to lower rates to put record dry powder to good use.
Nothing really new, the PE industry has experienced many cycles before but this one will be particularly brutal in my humble opinion because I see a long and painful recession ahead.
Now, to the discussion with Giovanni, at minute 5:10 Jim states:
Behind this stuck money, the reality is there is less money to feed the beast. When you really think, this year in the past 12-month period, I think 45% of all capital raised this year has been raised by the top 20 GPs. When you think about that, you're thinking 3,000 managers, 12,000 managers, 15,000 managers, the knock-on impact is massive for those smaller managers. If you don't have an investor relation platform to keep you in tune with what's going on, it's a much more difficult environment to raise money. I do think that's one key factor. Obviously, you need great results but even among those that have great results, some of them cannot fundraise because they don't have the machinery to fundraise like other managers so it's a very interesting dynamic, no doubt about it.
Aka, if you're not Apollo, Blackstone, Brookfield, Carlyle, KKR and other elite PE funds with an IR team bigger than most smaller PE funds, good luck fundraising even if you have stellar results.
Giovanni asked Jim: ''From a psychological point of view, do we invest in the largest managers because it's safer, nobody is going to fire you if you invest in the biggest one and you need to do more work to invest in a smaller one?"
Jim replied:
In some pensions, that clearly is the game. It's hard for us to pick those second or third-tier managers unless there's some other key features like is there a local tilt, or is it a venture or growth or some other component really focused on a key matter like energy, renewables or some other other factor that allow you the gateway to do that. If it's otherwise, it has to clearly be top-quartile.
But when you think about top-quartile, that's not a very clear term. We often hear everybody is at least in the second quartile and if 100% of the people are in second quartile, is it really a number? No, those things are difficult. There are some people stuck there but in reality if you're creating your own strategy, what are you doing in the mid market, what are you doing in the mega market, what are you doing in venture and growth? You might pick brand names but even if I picked a brand name in venture, I might get an allocation of $5 million but I might want an allocation of $100 million. So, even if you stick in the brand names -- except for the mega PE funds -- you can get blocked out as well, so you do have to pick others. For us, we have 51 managers, I'd say 12-14 of them are bulge bracket names but then we have a lot of others that fill in gaps and most of that is picked by sector which is part of our core strategy.
A few quick points here. First, nobody is paid to go with smaller less well-known managers, The first job any pension fund manager has is to manage career risk. That goes for Jim Pittman, Caitlin Gubbels, Martin Longchamps, Simon Marc or any head of private equity at a large fund. So you better cozy up to the "Blackstones of this world" and make sure you're getting significant co-investment opportunities to reduce fee drag and maintain a healthy allocation to private equity.
When Jim states there are 12 to 14 brand name funds at BCI's PE portfolio of 51 funds, what he doesn't tell you is they make up the bulk of the assets at BCI's private equity portfolio and it's the same thing at Canada's Maple Eight.
The rest of the niche sector funds are covering holes but they're not the most important funds because the name of the game is scale and it will always be about scale first (with performance, of course, but that comes from co-investments, not fund investments).
What else? He's right, this nonsense of top-quartile is just that, total nonsense, the industry should stop peddling this nonsense (again, it's all about scale, co-investments and maintaining a healthy allocation to PE).
Lastly, on niche strategies like venture, he's also right, good luck getting a meaningful allocation.
When I was at PSP helping Derek Murphy set up private equity there, I cold called Doug Leone who was the managing partner at Sequoia Capital at the time (2004) and practically begged him to meet Derek and Gordon Fyfe back then.
After my third call in two days, he bluntly told me: "Ok kid, I like your persistence, I'll meet your pension people but my best advice is don't go into venture cap, you'll lose your shirt and as far as an allocation, we are fighting internally on whether to allocate more to Harvard or Yale Endowment. Our last $500 million fund was oversubscribed by $4.5 billion."
I swear to God, that's exactly what he told me back then (times have changed).
Well, Derek Murphy and Gordon Fyfe did meet up with him at Sequoia Capital and they loved it even if they didn't get an allocation.
Gordon told me it was their best meeting by far, adding "these guys made a killing off the Google IPO" and Derek being Derek grunted: "I never felt so poor in my life" (typical Murph, always chasing the almighty buck!).
Anyway, all this to say, venture capital will always remain a very small slice of any large pension fund's private equity portfolio (typically 3% of total pension assets) and it's very hard making money in venture cap, even for the Sequoias of this world.
One other thing Jim neglected to mention is he has seeded private equity funds in the past.
Specifically, when Searchlight Capital was founded in 2010 by Eric Zinterhofer, Oliver Haarmann, and Erol Uzumeri (formerly of OTPP's Private Capital team), opening up offices in London, New York and Toronto, its anchor investor was PSP Investments and Jim and Derek set that up (took an equity stake in the GP which was later sold at a big profit).
Now, I have mixed feelings on seeding hedge funds or private equity funds (it’s risky and opens the door wide open to conflicts of interest) but in this case, it was a huge success.
Seeding funds is another avenue to make big returns but it's hard and full of risks.
Alright, let me wrap it up there, Jim covers a lot more in his interesting discussion with Giovanni Amodeo but I'll let you watch that discussion below.
It's rare to get an allocator's perspective like this and Jim tells it like it is and adds great insights.
Now, before I forget, Net Zero Investor sat down with Jennifer Coulson, senior managing director & global head, ESG at BCI, for a Q&A on engagement in private markets. You can read the interview here.
Also worth mentioning BCI's has developed its accessibility plan to foster a more inclusive work environment, specifically for people with disabilities:
BCI is committed to making our workplace accessible and inclusive for everyone. Our focus is on reducing and preventing barriers to meet the needs of people with disabilities working within our organization or interacting with us. We are continually working to align our approach to accessibility with best practices and meaningfully implement the requirements of the Accessible British Columbia Act. We believe in creating an inclusive environment that accommodates the diverse needs of our employees to enable them to excel. By prioritizing accessibility, we strive to ensure that everyone can access our services and information in a way that respects their dignity and independence.
On LinkedIn, Zohra Halani, Senior Manager Equity, Diversity and Inclusion posted: "Grateful for BCI's Accessibility Committee for their support and guidance in achieving this milestone. Now the work begins!"
Indeed, now the work begins not only in ensuring a fair and equitable work environment for all but also in training managers and senior managers how to treat all employees fairly and equitably without any prejudice and how to ensure everyone has the ability to achieve their full potential regardless of their visible or invisible disabilities.
Times have changed drastically for the better on this front since my days at PSP when people with disabilities were an afterthought and basically nowhere to be found or just grossly mistreated.
I invite all pension funds to emulate AIMCo's plan on DEI as they're by far the leader (in my humble opinion) on equity, diversity and inclusion (not perfect but a great example to follow and I credit Evan Siddall and his senior managers for that).
Alright, let me wrap it up there.
Below, Jim Pittman, Executive VP and Global Head of Private Equity at BCI, joins Giovanni Amodeo for a fireside chat to discuss BCI’s private equity proposition and his outlook on the market.
Overall, Jim Pittman’s insights provide a candid look at the private
equity industry, highlighting the challenges and opportunities in the
current market environment. Take the time to watch this interview.
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