IMCO Ramping Up its Private Equity Portfolio

IMCO announced it closed more than CAD$2-billion in private equity transactions in 2021:

The Investment Management Corporation of Ontario (“IMCO”) has closed $2.3 billion in private equity transactions in 2021, adding four strategic partners by making four new fund commitments totaling nearly $1.5 billion, and completing seven direct equity and co-investment deals with new and existing partners totaling nearly $800 million in a record year.

“IMCO’s Private Equity program is differentiated by our ability to complement our long-term strategic partner relationships with the direct investing capabilities of our highly experienced team,” said Craig Ferguson, Managing Director, Private Equity, IMCO. “The result is a highly resilient portfolio that enables clients to efficiently access investment opportunities diversified across geographies, sectors and products. Despite the challenges of the pandemic, 2021 was a year of record execution of our growth strategy, and we are delighted to partner with like-minded investors and managers to add value and help portfolio companies achieve their full potential.”

IMCO’s Private Equity program is designed to achieve superior risk-adjusted returns for clients through a differentiated hybrid approach to investing, leveraging long term relationships with best-in-class strategic partners around the world, with a highly experienced team capable of making direct equity and co-investments. IMCO’s Private Equity team is predominantly focused on the buyout segment of the market, including companies in North America and Europe with strong management teams. The portfolio seeks to invest across a range of sectors such as industrials, services, consumer, technology/media/telecommunications, healthcare and financial services. As of December 31, 2020, IMCO’s Private Equity portfolio had net investments of $2.7 billion. The portfolio is expected to grow to more than $6 billion in five years.

New Strategic Partners and Fund Commitments

• In line with its investment strategy to add European exposure in resilient sectors, IMCO made a commitment to Ardian (“Ardian”), one of the leading European private equity fund managers based in France that is also a leader in sustainable investing. Ardian’s buyout platform makes control investments in European middle-market companies focused primarily in four core sectors: healthcare, the food value chain, technology and services. In addition to the fund commitment, IMCO completed a co-investment alongside Ardian in 2021.
• IMCO also added greater North American exposure to the private equity portfolio with fund commitments to new strategic partners GI Partners (“GI”), KKR, and Peloton Capital Management (“Peloton”).
• GI is a private investment firm focused on private equity, real estate, and data infrastructure strategies. The private equity team aims to pursue control-oriented investments primarily in the healthcare, IT infrastructure, services, and software sectors. IMCO also co-invested alongside GI in the acquisition of Valet Living, the largest national provider of amenity services to the multi-family residential real estate industry in the United States.
• KKR is one of the world’s largest private equity investors. IMCO made a commitment to its North American private equity platform, which pursues primarily control investments in upper middle-market, large capitalization companies and platform buildups, as well as growth equity investments in the industrials, technology, media, telecom, consumer, healthcare and financial services sectors. IMCO has co-invested alongside KKR in the acquisition of Neighborly Brands, one of the largest franchisors of “do-it-for-me” home services in the United States.
• Peloton is a Canada-based private equity firm focused on control and minority investments in the North American middle-market businesses in the financial services, healthcare services and consumer sectors.

Deepening Relationships with Existing Strategic Partners

• Since announcing a new relationship with Kohlberg & Company (“Kohlberg”) in October 2020, IMCO has closed three direct equity and co-investment deals alongside this strategic partner.
• In 2021, IMCO made a direct equity investment alongside Kohlberg — in the acquisition of Ob Hospitalist Group, the largest obstetric hospitalist services provider in the United States. IMCO also co-invested alongside Kohlberg in the acquisition of Area Wide Protective, the market leading provider of temporary traffic safety management services in the United States, and in the acquisition of Myers Emergency Power Systems, a market-leading designer and manufacturer of custom-engineered and regulated emergency backup power inverter solutions and smart control technologies.
  

ABOUT IMCO

The Investment Management Corporation of Ontario manages $73.3 billion of assets on behalf of its clients. IMCO’s mandate is to provide broader public sector institutions with investment management services, including portfolio construction advice, better access to a diverse range of asset classes and sophisticated risk management capabilities. IMCO is an independent organization, operating at arm’s length from government and guided by a highly experienced and professional Board of Directors. Follow us on LinkedIn and Twitter @imcoinvest

IMCO is ramping up its private equity portfolio and it wants the world to know, so I am blogging about it.

I would have loved to chat with Craig Ferguson but truth be told, I didn't reach out to IMCO and they didn't reach out to me either. With the holidays right around the corner, many people are already out of the office. 

Anyway, before delving into the press release above, let's first look into IMCO's private equity portfolio:

We invest in a portfolio of primarily private operating companies, directly or indirectly, where there is a strong opportunity for value creation through strategic, operational and financial improvements.

Whether investing through co-investments or funds, we primarily target the industrial, consumer, technology/media/telecom and healthcare sectors. IMCO takes a dynamic approach that could increase concentration to sectors, geographies or strategies in some periods, or limit our allocation to private equity in periods when opportunities are less rewarding.

As stated above, as of December 31, 2020, IMCO’s Private Equity portfolio had net investments of $2.7 billion and the portfolio is expected to grow to more than $6 billion in five years.

Next, let's look at Craig Ferguson's bio:

Craig Ferguson joined IMCO in 2020 as Managing Director, Private Equity. He provides guidance and strategic direction to strengthen the private equity asset class and deliver long-term growth for clients. Craig’s focus is on developing a high-performing investment portfolio by building relationships with strategic partners, and sourcing, executing, and managing private equity investments.

Craig has over 20 years of experience originating, structuring, and executing private equity transactions. He also has extensive experience as a director on private company boards.

Previously, Craig was a Managing Director at Manulife Capital where he spent nine years leading deal teams in private equity and credit investments. Prior to that, he was a Principal at McKenna Gale Capital.

Craig holds an Honours Bachelor of Business Administration from Wilfrid Laurier University. He is a CFA charterholder and Chartered Professional Accountant.

Craig is an active member of the Canadian Venture Capital and Private Equity Association, serving as a member of the planning committee for the association’s annual meeting. He has completed multiple triathlons, has been a team leader in the Ride to Conquer Cancer, and volunteers as a youth hockey coach in his community

Like I said, I would love to talk to him one day, he has great experience and two solid senior principals to help him, Anastasia Elia and David Lee:

Anastasia Elia joined IMCO in 2021. She has over 13 years of capital markets and investment experience specializing in private equity funds and direct investments as well as in fundamental public equities. Previously, Anastasia worked with CPP Investment Board where she was responsible for leading deal teams in evaluation of new and existing fund managers as well as direct investments, developing investment recommendations and leading legal negotiations across a variety of growth and buyout opportunities in North America and Europe.

Anastasia holds an MBA from Rotman School of Management at University of Toronto, a BBA from the University of Toronto, and is a CFA Institute charter holder

David Lee joined IMCO in 2020 as Senior Principal, Private Equity.

David has over 10 years of private equity experience with a deep understanding of the global private equity market. Previously, David was Director, Private Equity & Credit at Manulife Capital where he was responsible for leading direct investments across various industries and managing multiple funds.

David holds an MBA in Finance from the Rotman School of Management, University of Toronto, a Bachelor of Applied Science from the University of
Waterloo and is a Chartered Financial Analyst.

His boss, Christian Hensley, also has tremendous experience and the strategy in private equity is similar to the strategy in private debt, invest with world-class partners and leverage those relationships as much as possible.

Recall, in late October, I discussed how IMCO invested US$500 million with Antares Capital to finance loans in the mid-market space. That portfolio will target between 75 and 100 transactions for US and Canadian issuers operating in the mid-market space. 

Craig Ferguson and his team need to do the exact same thing, invest large amounts with top buyout funds that operate all over the world and critically important, co-invest alongside them to reduce fee drag. 

Now, as of December 31, 2020, I note IMCO has 14% invested in Real Estate, 8% invested in Infrastructure and only 4% invested in Private Equity. 

I say only 4% in Private Equity because relative to its peers, it is well below the average (12%) whereas Real Estate and Infrastructure are within the averages (they can increase infrastructure a bit more).

In order to quickly scale up private equity investments in a cost-effective manner, you need to invest in top funds and co-invest alongside them on larger transactions to reduce fee drag.

Earlier this week, I had a very interesting conversation with Yup Kim, Investment Director and Head of Investments, Private Equity at CalPERS. 

CalPERS wants to increase its allocation to Private Equity from 8% to 13% but I told Yup, to do this properly and in a cost-efficient manner, they need to co-invest with their GPs on larger transactions:

On co-investments, which was central to my discussion last week, I reiterated my concerns:

A bigger issue for me is how will CalPERS move from 8% in Private Equity to 13%?

Here is what I posted on Linkedin earlier today:

[...] the biggest issue CalPERS will face going from 8% to 13% in private equity is how to do this in a cost effective manner which takes into account the size of their total portfolio. For example, CPP Investments which is Canada’s biggest pension fund, has roughly the same assets as CalPERS (a bit less in USD but growing fast) but invests 25% of its assets in PE through partnerships with top global funds and more importantly through co-investments with top funds on large transactions to reduce fee drag and remain well allocated in private equity. This allows them to get the most bang for their PE buck but to do co-investments properly, you need a dedicated PE team that knows how to analyze them and direct investments. You need to compensate these people properly to attract and retain qualified staff.

Importantly, forget leverage, the focus needs to be on the approach CalPERS will use to invest in private equity.

If CalPERS doesn't beef up its co-investment capabilities, it will never be able to increase its allocation to private equity in a cost effective way and achieve its long-term return target.

Only investing in funds won't cut it, the fees are a big drag on returns over time.

I shared some more context with Yup, telling him if you do a performance attribution at the private equity portfolios at Canada's large pensions, you'll see that co-investments where LPs pay no fees rank at the top, followed by purely direct deals (small fraction of portfolios), syndication deals, and fund investments rank at the bottom because of fees.

I also told him at the more developed PE programs at Canada's large pensions, co-investments make up almost half the portfolio, allowing these large pensions to maintain a sizable allocation to PE while reducing fee drag. 

Yup agreed that co-investments are critical and require two things to be successful:

1. Solid governance process (flexibility is necessary)
2. Speed of analysis and quick turnaround time to maintain solid co-investment relationships with GPs (once you develop a reputation, it's easier).

He told me that co-investments now make up 25% of the private equity investments CalPERS has made since July 2021, and they are looking to grow that (very respectable, I thought it was less). 

But he also cautioned me that "co-investments aren't just about fee reduction, they're about developing robust relationships with our GPs where we learn from them and understand their investment judgment and capabilities."

He added: "Unlike the Canadian funds that have dedicated direct teams twice the size of their funds teams, we’ll need to take a slightly more integrated approach between our fund segment and direct teams."

I said: "Don't believe everything you hear, Canada's large pensions still rely on fund relationships first and foremost in private equity and that will never change."

What else?

Yup told me they're doing active due diligence on all their PE partners, learning as much as possible on their investment process, not waiting for fundraising to roll around, but instead developing long-term collaborative relationships and being more proactive in sourcing funds and deals. 

He said they're looking into bolstering their data and integrating data from public markets too to help them with their selection process on funds and deals. 

Lastly, in terms of going from 8% to 13% in Private Equity, Yup cautioned me: "It won't happen overnight. We need to diversify vintage year risk properly, it will slowly happen over the next five years as opportunities arise."

I totally agree and I like the way CalPERS is looking at the entire PE spectrum despite its size. 

The biggest mistake some Canadian pensions do is they ignore certain segments of private markets because "they don't move the needle."

Now, interestingly, in that comment earlier this week, I also shared three Canadian private equity funds with Yup: Maverix Private Equity, Searchlight Capital and Peloton Capital Management.

 In the press release above, you'll see IMCO added four strategic partners by making four new fund commitments totaling nearly $1.5 billion, and completing seven direct equity and co-investment deals with new and existing partners totaling nearly $800 million in a record year. 

The four partners are Ardian, GI Partners, KKR and Peloton Capital Management which I covered two years ago here. 

I was actually surprised IMCO invested in Peloton, not because they're not good or in line with their PE strategy, but because they're small and a new fund.

In a press release put out in July, Peloton stated it closed its first fund at $550 million and IMCO was a major investor:

Peloton Capital Management (PCM), a Canadian private equity firm with a long-term approach to middle-market buyouts in the North American market, announced today that it has closed its first fund at $550 million. The Investment Management Corporation of Ontario (IMCO), an Ontario public fund manager with $73.3 billion of assets under management, has invested in the fund alongside Canada’s largest banks and Stephen Smith, Chairman, CEO, and co-founder of First National Financial Corporation and Chairman of PCM. In addition, several institutional investors, high net worth individuals and family offices have also made commitments to the fund.

Since the firm’s inception and launch of its first Fund, PCM has invested nearly 50% of the committed capital across five fast-growing and market-leading companies in the healthcare services and financial services sectors.

 “The investments we’ve made to date – of which three were closed amid the pandemic – are all performing well,” said Steve Faraone, Managing Partner at Peloton Capital Management. “We are very pleased with the investment partnerships we have already consummated, and several more attractive opportunities are currently being evaluated.” 

Differentiated approach to investments

Unlike many middle-market private equity firms that take a short-term, generalist approach to investing, PCM differentiates itself through its long-term capital and orientation; deep sector expertise and focus on financial services, health care, and consumer markets; and relationships-first philosophy.

 “Our differentiated strategy and approach to investing has proven to be quite powerful in the market. It has enabled us to attract world class investors in the fund and it has positioned us as a very attractive partner to the founders of the companies we are investing in,” said Mike Murray, Managing Partner at Peloton Capital Management.

 PCM aims to build a concentrated portfolio of 7 – 10 platform investments from this first fund, focusing on well-established, profitable companies that have $5 million to $40 million of EBITDA and present compelling opportunities to build long-term, sustainable value.  

Prioritizing ESG in alignment with PRI

Since its inception, PCM has prioritized environmental, social, and corporate governance (ESG). In support of this philosophy, the firm recently signed the Principles of Responsible Investing (PRI) and will report annually on activities related to the integration of PRI and ESG within its portfolio. PRI is a voluntary and aspirational set of investment principles developed by investors, for investors, with the goal of developing a more sustainable global financial system. 

About Peloton Capital Management:  

Peloton Capital Management is a private equity firm that utilizes a long-term investment philosophy and sector-focused strategy to partner with founders and management teams to help build exceptional businesses and create attractive returns for our investors. PCM’s primary focus is investing in services businesses within the Healthcare, Financial, and Consumer verticals in North America. Headquartered in Toronto, Canada, PCM was founded and is led by a team with extensive private equity experience. For more information please visit: www.pelotoncapitalmanagement.com.  

About IMCO:

The Investment Management Corporation of Ontario (IMCO) manages $73.3 billion of assets on behalf of its clients. IMCO’s mandate is to provide broader public sector institutions with investment management services, including portfolio construction advice, better access to a diverse range of asset classes and sophisticated risk management capabilities. IMCO is an independent organization, operating at arm’s length from government and guided by a highly experienced and professional Board of Directors. Follow us on LinkedIn and Twitter @imcoinvest

Peloton is very lucky IMCO was an anchor investor in their first fund and I'm not sure how this happened but Stephen Smith is very plugged into the Canadian financial community and I'm sure he opened the right doors. 

I'm not saying this is a bad investment, quite the contrary, these are seasoned investors who have a long track record at OTPP and elsewhere but it helps when your name is Stephen Smith and you're the co-founder of First National Financial Corporation.

But the investment in Peloton is small (probably $250 million) relative to the investments in KKR, Ardian and GI Partners.

The most important relationship by far is KKR and the press release even states:

• Since announcing a new relationship with Kohlberg & Company (“Kohlberg”) in October 2020, IMCO has closed three direct equity and co-investment deals alongside this strategic partner.
• In 2021, IMCO made a direct equity investment alongside Kohlberg — in the acquisition of Ob Hospitalist Group, the largest obstetric hospitalist services provider in the United States. IMCO also co-invested alongside Kohlberg in the acquisition of Area Wide Protective, the market leading provider of temporary traffic safety management services in the United States, and in the acquisition of Myers Emergency Power Systems, a market-leading designer and manufacturer of custom-engineered and regulated emergency backup power inverter solutions and smart control technologies.

I don't think you can pick a better partner in private equity, KKR is truly the cream of the crop. 

But over the next five years, IMCO will make strategic commitments to new partners and co-invest alongside them to scale into private equity and reduce fee drag.

Craig Ferguson, Anastasia Elia and David Lee and the team they will hire will be very busy but it's critically important they get their strategy and relationships right.

I'm sure they will and look forward to talking to them when the time is right.

Below, Henry Kravis - his name is synonymous with 'Corporate Titan.' As co-founder of KKR, Henry Kravis re-wrote the rules of leveraged buyouts; he and his cousin George Roberts now rule over an empire that dwarfs some of the world's mightiest public corporations. (Great clip, watch this)