On Why Britain Still Excites OTPP's CEO Jo Taylor

Patrick Hosking of The Times reports that Britain still excites Jo Taylor, expert in the art of discovering a long-term winner:

Eighteen months ago Jo Taylor was one of a select band of deep-pocketed overseas investors who were very publicly wooed and schmoozed by Boris Johnson at a bash at the Science Museum, and entertained by the Queen at Windsor Castle.

The boss of the Ontario Teachers’ Pension Plan (OTPP) liked what he heard, saying at the time that Britain was politically stable, had predictable regulators he could do business with, had a largely steady exchange rate and was “a really attractive home for patient capital”.

Has he changed his mind, given the Truss chaos, the wobble in sterling and the decision by the Gambling Commission to deny Camelot, OTPP’s prize bauble in the UK, an extension to its national lottery licence? Add in moribund productivity growth, stubbornly high inflation and a flurry of disruptive strikes and the country might not seem very attractive to foreign investors just now.

In short, the answer is no. Taylor, a Brit raised in Bolton but now living in Toronto, remains supportive. His verdict today is that the UK still rates as “reasonable to good” as a place to invest. “Over the last 15 to 20 years, it has been a pretty good port of call for us.” And as an international investor, OTPP “still feels welcome here”.

Indeed, since the Windsor Castle excursion, he has piled more cash into the UK, buying a 25 per cent stake in SSE’s electricity transmission network and injecting capital into a string of private businesses including Inmarsat, the satellites business, and a new insurance underwriting vehicle at Lloyd’s of London.

OTPP also has a number of other potentially exciting technology-linked investments in the UK ranging from Beamery, a talent platform for HR people, to Lendable, an online loans business. Another innovative punt is Kry, which trades as Livi in the UK, a platform helping people to find GPs, both private and in the NHS.

In the space of a year total sterling- denominated assets held by OTPP have increased from C$4.4 billion to $6.6 billion, a 50 per cent increase.

But sitting in the pension scheme’s London office, a stone’s throw from Selfridges, and sipping a mug of Tetley tea, a brand he can’t get in Toronto, Taylor does not sound quite as enamoured with Britain as he was.

The Gambling Commission decision clearly still rankles. Camelot lost the franchise to the Czech billionaire Karel Komarek and initially planned to mount a legal challenge but dropped it. “We were disappointed by the process and the outcome for the lottery,” Taylor says. “I think that Camelot was and would have been a much better operator in the future of that licence. And we felt that some of the assumptions that framed the decision to go with a different operator wouldn’t be ones we’ve necessarily understood.”

Predictable regulation is one of four key elements Taylor considers when weighing up a country’s appeal. A massive backer of regulated infrastructure businesses, few things are more important for ensuring reliable, inflation-proofed returns.

He’s also worried about Brexit. One disappointment, he says, is the way the basic process of UK firms dealing with overseas customers has become “more complicated and bureaucratic than it used to be”. That will not be good for growth.

OTPP is seen as just the kind of patient and responsible long-term investor Britain needs to keep sweet. Weighing in at C$247 billion, it has huge financial firepower, but also particular expertise in infrastructure and private equity.

Established as a retirement fund for teachers in the Canadian province of Ontario, it has outstanding pension promises to 336,000 current and retired teachers. Women, who tend to live much longer, predominate. OTPP has 150 members over the age of 100 and several who have been drawing a pension for more than 50 years.

“It’s not the easiest funding dynamic,” Taylor, 62, remarks wryly. But the scheme is fully funded and has a strong investment record, he says, notching up average annual returns of 9.5 per cent since inception in 1990 and 8.5 per cent over the past ten years. Last year, when most investment institutions were reporting negative returns on the back of falling equity and bond markets, OTPP posted a positive 4 per cent return.

That’s mostly because of the scheme’s unusual asset mix. It has only 7 per cent of its assets invested in listed shares, compared with about 60 per cent in a conventional pension fund. Instead it has made huge allocations to private equity and infrastructure in particular, both of which have delivered much higher returns in recent years.

That approach has caught the eye of UK ministers, who are urging UK pension funds to look across the Atlantic at how the Canadians manage things. They want higher investment in UK unlisted companies, particularly in technology-related fields such as life sciences, advanced manufacturing and digital.

Taylor says how UK pension funds are reformed is “up to others to decide” but adds that OTPP has had certain advantages both because of its huge scale and its decision to keep investment in-house, rather than farming it out to third-party fund managers. It has 450 investment professionals, including 100 in London. One of the key reasons for OTPP’s success was the decision by the board to appoint an investment team who are paid market-rate salaries. “If you don’t do that, you won’t make the best returns, in my opinion.” The philosophy extends to Taylor himself, who was paid C$6.35 million (£3.8 million) last year.

Not every investment decision has paid off. OTPP emerged recently as a significant backer of Sam Bankman- Fried, whose crypto-business FTX collapsed in November, prompting fraud charges. OTPP had only recently put US$95 million into the business, raising questions from some Canadian teachers about what kind of due diligence had been carried out

Taylor says a review into the decision is continuing. “One thing I would stress is that $95 million, whilst a lot for an individual member, is not a lot for the plan. We’ve got to be a bit careful [we don’t] overcompensate.” Some of the best-known technology investors such as Sequoia and Lightspeed also ploughed money in, he points out.

High-risk, high-return investing is in Taylor’s bones. He spent 24 years at 3i, including running the technology investment team in the rollercoaster dotcom boom-and-bust years. “I think in 1999 we had an attempt to IPO 43 companies. We got to about 32 and then ran out road,” he recalls.

3i stalled badly in the banking crisis years and in 2008 Taylor hatched a plot to create a fund to buy its international venture capital investments. He was told he had to leave first to avoid any perception of a conflict of interest. He did so, only for 3i’s chief executive at the time, Michael Queen, to tell him he would not sell to him. “It would’ve been helpful if someone had told me that before,” says Taylor, “But I have absolutely no regrets.” His newly created buying vehicle, Ethean Capital, was dissolved and Taylor went plural for a while, joining various boards and backing various ventures with his own money.

The most successful was Kainos, the Belfast-based software company, which is now listed and a member of the FTSE 250. Taylor initially came on board as a non-executive director and later bought in to the company.“It wasn’t a big stake but I made about 150 times my money on it,” says Taylor. How much was that exactly? “A lot.” That has helped finance his collection of abstract art, including works by Guelfenheim.

He made a lot of profit buying into other technology companies, whose valuations were on the floor at the time, he says, but it was “a lonely journey” so he went to work for OTPP in 2012, rising to the top job in 2020.

 “What’s great for me at my age is actually hanging around smart, useful people who have lots of energy and ideas, which I get in spades here.”

OTPP's CEO Jo Taylor has been busy lately talking to a few reporters.

Recall, he recently spoke with Barbara Shecter of the National Post on inflation, real estate and where the $247-billion fund sees opportunities today. I covered that interview here.

With the The Times, Jo discusses opportunities he sees investing in the UK, a stalwart for Teachers' an other large Canadian pension funds.

The UK has always been a place that attracted Canada's large pensions.

In 2012, The Telegraph wrote an article on Canadian pensioners who own Britain.

The attraction to the UK is the same attraction to Australia, namely, predictable regulation, a sound legal system, and an openness to international investors.

In infrastructure in particular is where Teachers' and other large Canadian investors have invested huge in the UK.

OTPP is a leader investing in regulated infrastructure but also in transportation infrastructure, buying big stake in the UK's top airports like London City Airport which teachers', OMERS and others bought for a rich premium back in 2016.  

But OTPP is also investing in innovative companies through its Teachers' Venture Growth (TVG) platform:

Our strategy

At Teachers' Venture Growth (TVG), we invest directly in innovative, late-stage companies (Series B onward) that are using technology to shape a better future. As active investors, we partner with founders and management teams to provide global expertise, resources and guidance, rolling up our sleeves to support them in fulfilling their bold visions. We prefer to lead rounds but will also participate alongside like-minded partners. TVG also selectively invests indirectly through fund commitments to some of the world’s leading venture capital and growth equity firms. We invest across North America, Europe and Asia.

A long-term direct investment approach

As part of one of the world’s largest pension plans, we take great pride in our responsibility to provide retirement security for more than 336,000 teachers across Ontario. Because we pay pensions over multiple decades, we bring a long-term perspective to investing. Our capital can be flexible and grow with the needs of our portfolio companies. We don’t have a cap on how much we can invest or limits on how long we can invest. We have the resources and expertise to guide our portfolio companies to become generational businesses. We have a proven, global track record backed by 30+ years of expertise across asset classes and C$247.2 billion in net assets.

Our portfolio

Our global portfolio spans multiple sectors and stages. As part of Ontario Teachers' large, diversified portfolio, Teachers' Venture Growth can provide unique strategic partnerships and platforms, and cross-over support capabilities for companies looking to go public.

 Sometimes those investments pan out, sometimes they don't.

Teachers' and other sophisticated funds got scorched investing in FTX, exposing weak due diligence.

While that investigation is "ongoing" there's no doubt in my mind this represents a huge and embarrassing debacle for an organization that has traditionally prided itself on being a leader in due diligence.

Teachers' will survive FTX but let there be no mistake, higher for longer rates are here to stay and the next global recession will be of an unparalleled breadth and depth, killing the venture capital capital industry for a very long time.

Still, innovation never sleeps, it's constant and there are always great opportunities.

Just today, one of LTK Capital Management's top biotech positions, TG Therapeutics (TGTX) was up 23% after obliterating bullish sales calls:

Back in December, TG Therapeutics announced the FDA approval of BRIUMVI, the first and only anti-CD20 monoclonal antibody approved for patients with relapsing forms of multiple sclerosis that can be administered in a one-hour infusion twice-a-year following the starting dose.

Having had MS for over 25 years, I track exciting developments in the treatment of this disease and this is definitely exciting.

I chuckle when I read "High-risk, high-return investing is in Taylor’s bones."

Jo Taylor and all of Canada's CEOs and CIOs haven't seen high-risk, high-return investing unless they sit down with me all day screening markets, understanding macro and finding biotech gems like TG Therapeutics (TGTX), Mirati Therapeutics (MRTX), Fulcrum Therapeutics (FULC) and many more!

I'll show all of of you what high-risk, high-return investing is all about, marked-to-market, of course!

In fact, LTK Capital Management is up over 220% year-to-date, trouncing the returns of elite hedge funds, private equity funds and Canada's large pension funds.

And all this despite suffering from agonizing and paralyzing nerve pain from a bulging disc at my L3/L4 level before undergoing emergency back surgery Friday under the care of Dr. Ahmed Aoude, the software designer turned surgeon who found a path 'between medicine and engineering'. 

[Note: See more details on my surgery here].

Alright, enough about me, my miserable sore back days are over but I'm falling asleep writing these long comments because of medication they gave me (although my wife says my blog is the cure for insomnia).

Some parting thoughts.

Jo Taylor will likely go down as one of the most important CEOs at OTPP.

It goes like this: Claude Lamoureux, Jo Taylor, Jim Leech and Ron Mock.

But Jo's chapter isn't done yet and there is a nasty global recession headed our way.

Teachers' pays Jo big bucks to lead this organization -- a lot more than he's probably worth -- but he has incredible experience at 3i and he is a solid CEO who understands markets and international markets better than most.

He's also distinctly British, loves God, country and the Queen (now King), and is a very smart and pleasant guy to talk with.

Along with OMERS, OTPP has delivered the best results, gaining 4% in 2022.

That was last year, this year will be far more challenging as a nasty global recession lies straight ahead

Again, LTK Capital Management remains at your disposal and will teach all of Canada's large pension funds how to make big bucks in all market environments, marked-to-market, not marked-to fantasy.

Below, Joe Bae, KKR co-CEO, joins ‘Squawk on the Street’ to discuss if the regional banking drama has affected KKR, the assets classes Bae is currently seeing ‘tremendous’ opportunity, and why this may be the moment for private lending.

And all you need to know about the coronation of King Charles III.

I'll be watching this glorious event and so will Jo Taylor and millions of others all over the world.

I actually like and admire King Charles, he's no Queen Elizabeth, but he's going to be an incredible king carrying out his royal duties in the same way his mother did, with dignity, integrity and courage.