OTPP Introduces Teachers’ Venture Growth and Plans on Scaling it Up

David Milstead and Sean Silcoff of the Globe and Mail report that Ontario Teachers’ Pension Plan plans on tripling its commitment to tech investing:

Ontario Teachers’ Pension Plan intends to dramatically increase its investments in private technology companies despite a sharp drop in valuations in recent months.

The pension plan – the third largest public investor in Canada – says it will add staff with a goal of making private tech investments 7 per cent to 10 per cent of the portfolio, up from 3 per cent, or $7.1-billion today.

At $241.6-billion in assets at the end of 2021, Teachers trails only the Canada Pension Plan Investment Board and Caisse de dépôt et placement du Québec in asset size, and is the largest single-employer public pension manager in Canada.

That growth goal could translate into billions more dollars in private tech, because Teachers aims to reach $300-billion in overall assets by 2030. If private tech is 8 per cent of a $300-billion portfolio, that would push Teachers’ holdings in the asset class toward $25-billion.

Greater investments in companies that have not yet gone public would be a shift for Teachers, which has historically placed a large proportion of its portfolio in publicly traded stocks and bonds.

“First and foremost, it’s about returns,” said Olivia Steedman, senior managing director of Teachers Innovation Program. “I think we can all agree that earlier-stage investing, while it comes with more risks, can offer higher returns.”

Ms. Steedman’s department returned 40 per cent in 2021, even as publicly traded technology companies began a hiccup in November of last year. Since a peak in the fall, the prices for a number of prominent tech stocks in Canada and globally have fallen by 50 per cent or more. While the devaluation hasn’t spread widely to private equity markets, industry watchers expect that to happen later this year, which could result in writedowns.

Ms. Steedman said Teachers does not currently see a need to take widespread writedowns of the value of its holdings, even though it made a number of late-stage investments when valuations were at their peak. That includes a funding in June, 2021, of Waterloo-based ApplyBoard, a company whose online platform aims to improve the process international students use to apply for schools abroad. The US$230-million financing valued the company at more than US$3-billion.

“We’ve been watching this big correction in the [publicly traded tech companies] very closely ourselves, and at this point in time, we don’t expect any major writedowns in our book; we’re very pleased with the positioning,” she said. “Certainly as we go forward ... we are looking very, very carefully at forecasts and thinking through the ability to deliver on those.”

Teachers CEO Jo Taylor told The Globe and Mail in June, 2021, that while tech valuations in general were “very high,” a disruptive company that delivers on its potential can make an investor’s entry price “pretty irrelevant quite quickly. ... If you want to play in that space, you’ve got to be willing to bite the bullet on businesses you really have high conviction around and invest regularly.”

As part of the plan to emphasize tech, the pension plan is renaming the department Ms. Steedman leads as Teachers’ Venture Growth, and hoping to add 12 investment professionals to the current staff of 24. The department, which has offices in Toronto, Hong Kong, London, and later this year, San Francisco, will also focus on a narrower set of technology investments after starting the department as “sector agnostic,” Ms. Steedman said. The new focus will be on enterprise software, logistics technology and innovations to address climate issues.

Ms. Steedman said the plan is to make initial investments ranging from $50-million to $250-million per company in enterprises with “proven product-market fit” that generate revenues and have unit economics that point toward reaching break-even levels on a cash flow basis.

Ms. Steedman acknowledged the widespread criticism that large Canadian pension funds don’t invest enough early and growth-stage capital in domestic companies. She said that while her group’s mandate is global and doesn’t have specific Canadian targets, “we think Canada is a very exciting investment environment. ... We think there’s some fabulous entrepreneurs here. We’ve absolutely heard that dialogue on, ‘why aren’t the Canadian pension funds doing more’ and we’re out there talking to companies and continuing to map the landscape.”

Barbara Shecter of the National Post also reports that Teachers' venture platform could triple its portfolio by 2030:

The Ontario Teachers’ Pension Plan Board’s venture platform is planning to double and potentially triple the size of its portfolio over the next five to 10 years.

The target was unveiled Tuesday, less than three years after Teachers’ Innovation Platform made its initial splash by investing in Elon Musk’s Space Exploration Technologies Corp., better known as SpaceX.

To help reach the goal of the venture portfolio accounting for seven to 10 per cent of the Canadian pension giant’s overall net assets, up from three per cent today, its staff will be substantially beefed up over the next year and a new office will be opened in San Francisco.

The platform will also operate under a new name — Teachers’ Venture Growth — to better reflect its focus on late-stage venture and growth equity investments in technology companies.

If Teachers’ reaches its target portfolio size of $300 billion by 2030, the venture platform’s projections put it on target to contribute at least $21 billion, up from $7.1 billion today.

Led by Teachers’ veteran Olivia Steedman, the platform has produced double-digit annual returns since its formation in 2019, and will bulk up over the next year with 12 hires and a new office in San Francisco. That’s in addition to around two dozen people already working from Toronto, London, Hong Kong and Singapore.

Steedman said the anticipated portfolio growth will be generated by a combination of direct investments and investments through funds.

“It’ll be around $2 billion a year that we need to put to work,” she said. “And we will continue to split that as we’ve been doing … Probably a quarter of that will go towards funds, with the balance going towards the direct style of investing.”

The platform led seven of the 10 deals it participated in last year, and Steedman said she is “keen that the market understands that we have that capability.”

She added that Teachers’ Venture Growth is seeking to establish itself as a platform that can go beyond deal execution, given it is backed by seasoned professionals such as Rick Prostko, a veteran Silicon Valley venture capitalist who was an early investor in grocery delivery app Instacart Inc.

“(It’s) very much how we work with our portfolio companies after we close,” she said. “We really see this as a long-term partnership with our entrepreneurs to help them scale their businesses … diversify their product offerings (and) expand geographically.”

Initial investments in target tech companies — which Steedman says share the aim of disrupting a marketplace to solve a particular challenge or problem — will remain between $50 million and $250 million. The plan is to continue the established pattern of follow-on investments if things go well.

Prostko was hired to head up the venture platform’s direct investing business in North America and build a presence in San Francisco, a beachhead that will now be expanded with a permanent office.

“We’ll be building out the team around him,” Steedman said, adding that the venture arm will work closely with other divisions within Teachers’ $241.6-billion pension plan.

“We’ve got this great team, but we also have the total fund behind us, this amazing endowment of global relationships, as well as 100-plus portfolio companies to bring to bear for the benefit of our entrepreneurs,” she said.

The venture platform’s recent investments include leading a 210-million-pound funding round for Lendable Ltd., a consumer finance platform powered by artificial intelligence, and dipping a toe into cryptocurrency by participating in a US$420-million funding round for FTX Trading Ltd., which owns and operates global cryptocurrency exchange FTX.com.

“Part of our mandate is to look at technology that’s shaping future markets, and we believe that digital assets are here to stay,” Steedman said.

“FTX, importantly, is not crypto itself, it’s an exchange,” she added. “We think of it as sort of an infrastructure play for us to enable the broader crypto markets as distinct from investing in a particular digital asset itself, which we haven’t done yet.”

Earlier today, OTPP put out a press release stating Teachers’ Innovation Platform becomes Teachers’ Venture Growth as part of ambitious growth plan:

Teachers’ Innovation Platform, the venture capital and growth equity arm of the C$242 billion Ontario Teachers’ Pension Plan Board (Ontario Teachers’), today announced a new name of Teachers’ Venture Growth (TVG). The new name will provide a clearer definition of the group’s offering as part of a growth plan that will more than double the size of its portfolio to comprise seven to 10 per cent of Ontario Teachers’ net assets over the next five to ten years, up from approximately three per cent today.

TVG has grown significantly since being established in 2019 to focus on late-stage venture and growth equity investments in cutting edge technology companies. Beginning with an initial investment in SpaceX in June 2019, TVG now holds a C$7.1 billion portfolio comprised of 20 direct investments and several partnerships with some of the world’s top venture funds.

“We’ve built a strong and growing investment department by rolling up our sleeves and helping mission-driven entrepreneurs scale their business, expand their offerings, and become leaders in their markets. We are excited to pursue our next phase of growth under our new name,” said Olivia Steedman, Senior Managing Director, TVG.

TVG pursues its next phase of growth on the back of successive years of strong double-digit returns. TVG plans to make 12 hires over the next year to support its ambitions to grow its global portfolio of investments across various sectors, including fintech, enterprise software, logistics-tech and climatech. TVG will also open a new office in San Francisco later this year to add to its existing presence in the local ecosystem and to work closely with TVG’s offices in Toronto, London and Hong Kong.

“Our offering features a diverse, agile team that can work at speed and access the global network and resources of one of the world’s largest pension plans,” said Ms Steedman. “As we move into our next stage of growth, we will look to build on our existing strengths to support the ambitions of an even broader group of visionary founders, and thereby expand the reach and impact of the companies that are shaping the future for people and the planet.”

TVG’s portfolio includes companies such as Applyboard, Epic Games, ComplyAdvantage, Kry, Tanium, and Pony.ai. Recent investments include leading the £210 million funding round for Lendable, a leading AI-powered consumer finance platform, and participating in the US$420m B-1 funding round for FTX Trading Ltd. owner and operator of FTX.COM, a global cryptocurrency exchange.

About Teachers’ Venture Growth

Teachers’ Venture Growth (TVG) focuses on late-stage venture and growth equity investments in cutting-edge technology companies worldwide. We partner with founders with bold missions, looking to expand their product offering, scale geographically, and become the leaders in their markets. We care about building sustainable companies with good governance, set up to successfully go public if they choose to. We think globally and act locally through our direct presence in San Francisco, Toronto, London and Hong Kong.

TVG is part of the Ontario Teachers' Pension Plan Board (Ontario Teachers'), a global investor with net assets of C$241.6 billion as at December 31, 2021. We invest in more than 50 countries in everything from equities to real estate to infrastructure and venture growth, to deliver retirement income for 333,000 current and retired teachers in Ontario. With offices in Hong Kong, London, San Francisco, Singapore and Toronto, our more than 350 investment professionals bring deep expertise in industries ranging from agriculture to artificial intelligence. We are a fully funded defined benefit pension plan and have earned an annual total-fund net return of 9.7% since the plan’s founding in 1990. At Ontario Teachers’, we don’t just invest to make a return, we invest to shape a better future for the teachers we serve, the businesses we back, and the world we live in. For more information, visit www.otpp.com/teachersventuregrowth and follow us on LinkedIn.

Alright, so Teachers' Innovation Platform (TIP) is getting relabeled as Teachers' Venture Growth and Olivia Steedman's team is growing all over the world to expand their investments in late-stage venture and growth equity investments.

I'll give you my thoughts but first a little background. 

Go back exactly three years ago, April 2019, when I interviewed OTPP's CIO Ziad Hindo on the Teachers' Innovation Platform (TIP):

Ziad began by saying "disruptive technology is everywhere" and OTPP built this innovation platform for three main reasons:

  1. Defensive: OTPP has over 100 portfolio companies and they want to understand how disruptive technology will impact them. This is part of Teachers' rigorous risk management approach.
  2. Offensive: OTPP is seeking high risk-adjusted returns and this platform will allow them to capitalize on new opportunities in disruptive technologies that will shape the world for years to come.
  3. Access to innovative partnerships: The platform will alow OTPP to build on its existing partnerhips but also to build new partnerships with technology leaders.
On that third point, Ziad mentioned OTPP's recent deal with Verily, an Alphabet (Google) company, on a $1 billion investment round led by Silver Lake, as it advances plans on business strategies that are additive and complementary to its current life sciences portfolio.

If you look at Verily's website, you'll read this:
Verily lives at the intersection of technology, data science and healthcare. Our mission is to make the world's health data useful so that people enjoy healthier lives.

Verily is developing tools to collect and organize health data, then creating interventions and platforms that put insights derived from that health data to use for more holistic care management. We have three guiding product design principles: start with the user, simplify care, and lead on security and privacy.
Pretty cool stuff. There's no doubt in my mind that Ontario Teachers' long relationship with Silver Lake, one of the best private equity funds focusing on late-stage technology, allowed it to be part of this deal with Verily.

Ziad told me there will be other partnerships that complement the existing private market activities. And these partnerships won't just be in the US or Canada, they will be global.

Back then, Ziad told me: "Teachers' has been investing in VC funds for a long time and successfully but there are no co-investment opportunities there," meaning it's hard to scale that activity.

Hence, with the creation of the Teachers' Innovation Platform now called Teachers' Venture Growth, they are looking to finance late-stage venture and growth equity investments in cutting-edge technology companies worldwide. 

Last year, I also spoke to Olivia Steedman on investing in new frontiers and she said three things differentiate TIP (now TVG):

  1. Global platform: They are looking all over the world to for opportunities in late-stage venture and she told me she visited Hong Kong, Beijing and London recently to meet with her colleagues and discuss strategy.
  2. Cultivating strong relationships with corporations: She told me the Teachers' brand is strong which is how they were able to invest in SpaceX and she said they have built on their relationships with Alibaba, Tencet and Google (the Verily deal) to leverage off these relationships.
  3. Patient capital: Their asset management approach strikes the right balance between "helping and letting them do the right thing". It's a targeted and flexible approach that centers around patient capital.
In terms of where TIP heads going forward, she said they are not focused on one technology and are looking to cover a few areas such as:
  • Fintech
  • Health related platforms
  • Smart cities 
  • B2C space 
They are currently working on their strategy and it covers a few sectors and geographies but again, the emphasis is on late-stage growth, they are not going to invest in early stage and will build on their venture fund program.

As far as the SpaceX deal, Olivia told me the company is working to launch Starlink, a next-generation satellite network capable of connecting the globe with reliable and affordable broadband internet services. She said this will offer access to broadband in remote areas of the world.

Interestingly, I recently read that Starlink, part of Elon Musk’s space company, aims to provide broadband to airlines as it pushes to reach business clients. 

Now, as stated in the press release above, TVG is growing its operations and its focus;

TVG pursues its next phase of growth on the back of successive years of strong double-digit returns. TVG plans to make 12 hires over the next year to support its ambitions to grow its global portfolio of investments across various sectors, including fintech, enterprise software, logistics-tech and climatech. TVG will also open a new office in San Francisco later this year to add to its existing presence in the local ecosystem and to work closely with TVG’s offices in Toronto, London and Hong Kong.

The articles above talk about TVG significantly increasing its commitment to tech investing, from the current $7.1 billion to over $20 billion as assets grow to $300 billion. OTPP's press release says this growth will take place over the next five to ten years as TVG's allocation grows from 3% closer to 10%.

Is this achievable? Yes, it is and Olivia Steedman explains how it will be done through funds (25%) and direct style investing (the balance; $50 million to $250 million tickets).

She added that Teachers’ Venture Growth is seeking to establish itself as a platform that can go beyond deal execution, given it is backed by seasoned professionals such as Rick Prostko, a veteran Silicon Valley venture capitalist who was an early investor in grocery delivery app Instacart Inc.

“(It’s) very much how we work with our portfolio companies after we close,” she said. “We really see this as a long-term partnership with our entrepreneurs to help them scale their businesses … diversify their product offerings (and) expand geographically.”

All this growth is definitely achievable but it's important to remember what OTPP's CEO Jo Taylor told me on the innovation portfolio when I went over their 2021 results with him and Ziad Hindo:

"The newer bit with higher volatility is the Innovation fund (TIP) which we started in the last couple of years. It did very well last year largely because of higher funding round valuations that impacted the majority of those businesses. We try to only take that valuation when we and other people invest as well (so it's credible way to say valuations progressed) but we recognize that this activity is one where we have to watch how it progresses in terms of valuations and liquidity requirements."

In other words, while TVG is expanding its operations, they are not getting caught up in the 40% gains they made in that portfolio last year and will remain very cognizant of valuations and liquidity (ie. market) conditions.

Let's face it, 2021 was an outlier year, we had another tech bubble play out mostly in hyper-growth Ark Innovation type of stocks which led the Nasdaq up to new record highs:

As shown above, those hyper-growth stocks peaked last January and as rates started creeping up, especially over the last six months, these high-flyers got hit hard and it has impacted the broader technology sector.

Now, the backup in long bond yields since the start of the year helps explain a lot of the risk aversion we are seeing. 

Not surprisingly, year-to-date, energy stocks are up huge while tech stocks are down considerably:

All this to say, 2021 was an outlier as a lot of hyper-growth tech stocks shot up on the back of unprecedented monetary and fiscal policy (unleashing a liquidity tsunami).

Now, does this mean it's game over for technology, especially venture capital which is riskier?

No, of course not! It means as rates normalize and go back to historic averages after reaching record lows at the beginning of the pandemic, we need to understand that the conditions that supported the technology sector are changing. 

Still, despite the current inflationary episode, I don't think we are heading back to a major stagflationary episode reminiscent of the 1970s.

Instead, I see long bond rates settling in around 2-3% over the next three to five years which is where they were for most of the post-war period and this won't impact investors' appetite for growth.

Technology bubbles come and go but the nature of our economies has shifted dramatically over the last 20 years with technology embedded in every facet of our lives.

Moreover, the transition to net zero will require massive investments in new technologies (cleantech).

Notice, TVG is focusing on fintech, enterprise software, logistics-tech and climatech. When economies are slowing, you want to go into software and fintech as that is a defensive move. 

Also, TVG is a long-term investor, so it will invest across technology cycles, knowing full well valuations go up and down but if  they hold over the long run, they'll make a lot of money.

This is an important point because people get too caught up in short-term moves in the Nasdaq.

I like what John Ruffolo, founder of Maverix Private Equity and OMERS Ventures posted on Linkedin recently:

Again, macroeconomic factors and valuations matter but if you are investing in the right technology company and maintain a long-term focus, you will survive turmoil and short cycles.

This is especially true if you have the right long-term partner like OTPP.

I have full confidence in Olivia Steedman and the entire TVG team:

TVG is growing, hiring new people, and this is an exciting team to join because they are building relationships with top VC funds and entrepreneurs from all over the world, helping to shape a world with disruption prompted by digital and other technology-based breakthrough developments.

A few concluding remarks and I'll be quick:

  • OTPP isn't the only one investing in new technologies. All of Canada's large pensions invest in venture capital and growth equity (through funds and directly) because they need to generate long-term returns as their plans mature.
  • OTPP is more vocal in communicating its intentions to grow TVG because it wants entrepreneurs all over the world to partner up with TVG as it grows its operations. It not only offers patient capital, it offers its brand and extensive network of portfolio companies and like-minded investors. And with Rick Prostko, a veteran Silicon Valley venture capitalist joining the team, they can offer startups expertise in scaling their business, diversifying product offerings and expanding geographically.
  • The way I look at TVG is from a total portfolio context. OTPP has cut its fixed income holdings to invest more in core infrastructure and it is taking some necessary risk to invest in private technology companies which will be tomorrow's disruptors. The best way I can describe it is as a somewhat barbell approach where most of the assets are in safe utility type investments generating stable cash flows but some assets are in higher risk growth companies that are growing fast (akin to a conservative investor investing mostly in blue chip dividend stocks and 5% to 10% in the Nasdaq but the returns in private markets are much bigger, commensurate with the risk).
  • Lastly, the Wall Street Journal posted an article on how US venture capital is pouring into Canadian tech startups. No doubt about it, we have great tech startups in Canada and TVG will look at investing in some of them, but the focus is global and it should remain global. Let TVG invest where it sees the best global opportunities. If some are in Canada, that's fine, but let them judge the merits of each investment and we need to stop telling our pensions that they need to invest more domestically. Let them decide where to invest, that is what they are paid to do

Alright, let me stop there, I've covered all the important points.

Let me just end by wishing Olivia Steedman and her TVG team a lot of success as they embark on their next growth phase. 

Below, CNBC's Julia Boorstin reports on the trends in venture capital and how it's impacting Silicon Valley. 

Interestingly, Larry Light of Chief Investment Officer reports that while VC is in the dumps, the money keeps rolling in:

To institutional investors, the returns over time from VC have been enticing enough to merit ever-richer investments. Global pension allocations to VC have edged up to an average 7.0% of portfolios in 2021, from 6.2% in 2017, Preqin data shows.

“We’ve yet to see a slowdown in fundraising,” says Brian Rodde, co-head of private equity at Makena Capital Management, in an interview.

The sheer amount of financial firepower sitting dormant suggests that a large amount of VC-funded initial public offerings is coming, which of course hinges on a reversal of investors’ now-diminished appetite for the stock market. The S&P 500 is down 7.3% this year. The number of U.S. IPOs plunged about 81% last quarter, compared with 2021’s comparable period, per Dealogic.

Meanwhile, private valuations have shrunk. Stakes in pre-IPO venture-backed companies, whose last financing round was in last year’s second half, dropped an average of 60% from their previous level, by the estimate of  Manhattan Venture Partners.  That might involve simply blowing off some excess. “Capital markets had been running too hot,” Rodde comments.

Make sure to read his entire comment here.