OTPP Reassessing its Private Equity Strategy
Ontario Teachers’ Pension Plan is reassessing its private equity strategy, moving away from full ownership of companies and focusing more on partnerships. The shift aims to mitigate risk and address the growing complexities of managing portfolio companies, Bloomberg reported.
The fund, which oversees around $266.3 billion, has historically acquired companies outright through its private equity division while co-investing alongside partners and external managers.
Moving forward, Ontario Teachers’ will increase its reliance on partnerships rather than direct ownership, CEO Jo Taylor said in an interview. With ongoing economic and geopolitical uncertainty, Taylor said working with partners helps reduce risk.
“You dial back the risk by doing it with a partner rather than doing it on your own,” he said.
Changing investment approach amid market challenges
Ontario Teachers’ shift comes as Canada’s largest pension funds, known as the Maple Eight, are reconsidering their investment strategies. These funds collectively manage about $2.3 trillion and have traditionally focused on long-term, direct investments, often taking full ownership of companies they back.
However, a prolonged slowdown in deal-making, high interest rates, and global trade uncertainties have prompted a reassessment of these models.
The shift away from full ownership reflects broader industry trends. In private equity, institutional investors are increasingly favouring co-investments and partnerships with external fund managers to spread risk and improve operational efficiency. This is especially relevant as high interest rates make leveraged buyouts more expensive and economic uncertainty affects valuations, Bloomberg said.
“Assets are taking more time, resources and effort to get to their full potential,” Taylor said. “Having partners who can help with that journey and actually that work is often a way of sharing the load.”
While the fund is reducing direct investments in new companies, it is still pursuing expansion through acquisitions within its existing portfolio. Insurance broker BroadStreet Partners, for example, has continued to grow by acquiring other firms.
Taylor did not rule out buying controlling stakes in companies but indicated that full ownership will be less common going forward.
Leadership changes in private equity division
Ontario Teachers’ is also restructuring its private equity leadership. Dale Burgess, the new interim executive managing director for equities, has taken on responsibility for private equity along with infrastructure and natural resources. The fund is evaluating leadership needs in private equity before making further appointments, Taylor said.
Former senior managing director Jean-Charles Douin, who led direct private equity investing from the London office, left last year and will not be replaced. Iñaki Echave, who previously co-led the private capital team for Europe, the Middle East, and Africa, now oversees the fund’s private capital efforts in that region, Bloomberg reported.
Kirk Falconer of Buyouts also reports Ontario Teachers’ private equity chief Romeo Leemrijse to depart:
Romeo Leemrijse, head of Ontario Teachers’ Pension Plan’s private equity strategy, is leaving the organization, according to an e-mail statement shared with Buyouts.
Leemrijse, named executive managing director of the global Equities group two years ago, “recently decided to leave,” the Ontario Teachers’ statement said. The reasons for his decision were not disclosed.
Ontario Teachers’ will conduct an internal and external search for new leadership “over the coming months,” the statement said. In the meantime, Dale Burgess, executive managing director and head of infrastructure and natural resources, will oversee Equities.
Burgess is “well-positioned to support a smooth transition,” the statement said, both as a senior member of the investment team and due to his existing relationships in Equities.
Leemrijse, a former GP with Edgestone Capital Partners, joined Ontario Teachers’ in 2006. Previously a group sector head in private equity, leading direct investing in North America, he was promoted to head of Equities in January 2023, replacing Karen Frank.
Ontario Teachers’ C$108 billion ($75 billion) Equities houses one of the institutional community’s largest private equity operations. With a portfolio of more than C$60 billion at the end of December, the strategy, known as Private Capital, allocates resources to both direct and fund investing, but with directs accounting for roughly 80 percent of the total.
As such, Ontario Teachers’ routinely buys direct stakes in companies and manages them in-house. Investing $100 million-$1 billion on average, Private Capital seeks opportunities in North America, Europe and Asia, and in sectors like digital and IT services, diversified industrials and business services, financial services, healthcare, sustainability and energy transition, and technology.
Deals done in recent months include Max Matthiessen, a co-control acquisition with Nordic Capital, and Omega Healthcare, in which Ontario Teachers’ became a co-lead investor alongside Goldman Sachs Alternatives.
This heavy weighting toward directs appears set to change owing to rising global uncertainty and a challenging deal market. In a Bloomberg interview, CEO Jo Taylor said Ontario Teachers’ aims to mitigate risk by focusing private equity activity “more on a partner basis.”
It is not clear whether Taylor’s comments reflect a fundamental shift in Private Capital’s traditional approach to the asset class, including a rejigging of the 80:20 directs-funds ratio, or merely a tactical response to market conditions at present.
Ontario Teachers’ is not the only large Canadian institution rethinking the extent of its directing investing. Last fall, OMERS said it would curtail the scope of directs undertaken by OMERS Private Equity and reintroduce fund investing, a significant move away from past practice.
OMERS this month announced the hire of Alexander Fraser as its new global head of private equity.
Ontario Teachers’ earned an overall 9.4 percent one-year net return last year, growing assets to more than C$266 billion. The private equity portfolio generated an 11.7 percent return against a 23.7 percent benchmark.
Let me get right into it.
First, the departure of Romeo Leemrijse, now the former head of Teachers' Private Capital.
I learned about it a couple of weeks ago and was very surprised.
Romeo has a stellar reputation, he's an experienced PE professional with high IQ and high EQ which is rare in this industry and from what I was told "he didn't have enough time to carry out his changes which is a shame".
It is a shame but this industry is cutthroat and when the going gets tough, heads start to roll and sometimes good people get caught in the crossfire.
In private equity over the last three years, there were changes in leadership at CDPQ, CPP Investments, OMERS and now OTPP.
Only BCI and PSP have kept their PE leaders, Jim Pittman and Simon Marc, because they have the right strategy and he and are delivering the requisite long-term returns (and both have the full backing of their respective CEO).
So what's going on?
Basically, the landscape has changed dramatically over the last few years, higher for longer, intense competition and geopolitical risks means large Canadian pension funds need to lean a lot more on their strategic partners in private equity and other private asset classes to deliver the returns they're seeking by co-investing alongside them on large transactions.
Put bluntly, the purely direct investing model is on its way out going forward, Canada's large pension funds that were doing it, mostly OMERS and Teachers' Private Capital are doing an about face and shifting back to fund investments/ co-investments to mitigate risks, enhance returns and most importantly, maintain a healthy allocation to the asset class as they grow.
From the first article above: "Taylor did not rule out buying controlling stakes in companies but indicated that full ownership will be less common going forward."
That pretty much sums it up right there.
And from the second article:
It is not clear whether Taylor’s comments reflect a fundamental shift in Private Capital’s traditional approach to the asset class, including a rejigging of the 80:20 directs-funds ratio, or merely a tactical response to market conditions at present.I doubt this is a tactical response to market conditions at present, it's more of a shift in strategy given the structural changes in the industry forcing them to react.
When I spoke to Jo last week going over their 2024 results, he shared this with me on private equity:
Let's not forget Private Equity has been a fabulous asset class for Teachers' over 20 years, we made lots of return in Private Capital over a long time and if it's having a bit more challenges at the moment, which I think it is, I think we have to be quite careful that we don't forget how much it's generated for the business.
If I had any question on Private Equity at the moment, it's probably around what's the right mix for us around direct investing on our own and co-investing with friends on a partner basis.
Remember we shifted to more direct investing on our own and I think the world is sufficiently uncertain at the moment that a few more deals with a few friends is more sensible.
[...]
I think what we are trying to figure out is what are the skills in the senior team more broadly than just the head and how do we pull that together.
We have some great people in our Private Equity team and I've been around the business for a long time.
But equally from time to time, we a looking how we in a relatively purposeful but agile way adapt to current circumstances.
It's hard at the moment to find new investment opportunities that are high quality and well priced.
Keep in mind Jo Taylor is a private equity expert, that's his background so if he's telling you it's tough out there, it's tough out there and they need to make sure they have the right strategy in place to keep producing stellar returns in that asset class.
Alright, let me wrap it up there.
Below, Joseph Bae, Co-CEO, KKR discusses what's driving private equity returns and where its finding value across the market with Bloomberg's Sonali Basak at Bloomberg Invest.
Great interview, take the time to watch it.
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