OTPP's Gillian Brown on Generating Alpha in Private and Public Markets
Take the time to watch the clip below as she runs through her thoughts on private and public markets and where Teacher's is focusing its attention on and where it's not.
A lot of the stuff I covered with Gillian when we last spoke here along with CEO Jo Taylor and and CIO of Asset Allocation, Stephen McLennan.
For example, Gillian shared this with me on private markets:
On the private asset side which is where we make the distinction in the mid-year around the performance of public markets versus private markets, the private assets were a pretty flat contributor to the portfolio this year.
Year-to-date, clearly not what we'd like to see out of some of those asset classes. And I think it's a continuation of the story I've been telling, if I think about private equity, we've been saying it has been a very important long-term contributor over to total fund results. We know that the industry is one in transition, that the economic environment is different than the one that created the heyday of private equity, so we need to be mindful of that in thinking about what those forward looking returns can be.
And making sure we are thinking about our portfolio with our Portfolio Solutions group, leaning into the assets, driving the returns we want out of those assets. But on a prospective basis, how much do we want in private versus public markets, how much do we want in our internal active management programs versus what we may give to an external fund manager where we think they have competencies we may not have in those specialty focused areas.
I think it's similar to some of the issues we would have discussed a year ago at this time, just that those markets are transitioning to a different macro and political environment and private markets takes more time to adjust to some of those changes versus public markets where more quick adjustments.
Gillian had this to say on long-term value creation: “I think the question is, how do you generate returns out of private assets? For us that means focusing on the operating-company-level results.”
She basically explains how rates reset after the pandemic and why financial engineering is dead in private equity, you need a long-term value creation plan and you need to be on the deal teams from the get-go.
She also explains why their expected returns for private equity has come down in a post-Covid world.
She also discusses why Teachers' decided to internalize international real estate because that wasn't Cadillac Fairview's "edge", it was more operating domestic office and retail properties.
Some of the more interesting remarks were on public markets where she admits OTPP and other funds cannot beat the S&P 500 especially in these markets but they still have conviction they can add excess returns in private markets over a cycle.
She also admits they lean on their external hedge fund managers to deliver some alpha over their beta exposure in public markets.
This goes back to the Ron Mock days when he told me: "beta is cheap, we can swap into any beta exposure for a few basis points and add alpha over that using external alpha providers that provide alpha we cannot generate internally."
To make a long story short, Teachers' invests roughly 10% of its assets in external hedge funds using a portable alpha structure and they try to generate T-bills + 300 bps (used to be T-bills + 500 bps).
She discusses how they got into private credit back in 2020 during the early days of Covid using funds initially but they've been doing it for a long time but never bucketed it as an asset class.
Lastly, she admits valuations in public markets are extended but "overheated stocks can become more overheated." They prefer playing the AI theme through private markets like electricity transmission or other AI related themes.
Anyway, take the time to listen to Gillian explain it all, she shares quite a bit and is an excellent communicator going through how they approach private and public markets.
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