OTPP's Dale Burgess and Brookfield's David Nowak on Whether PE's Best Days Are Behind It
Have expectations for private equity changed? What’s the role of the asset class in the portfolio these days?
These are the questions that Dale Burgess, executive managing director for equities at Ontario Teachers' Pension Plan, and David Nowak, president of private equity firm Brookfield, tackle in the second episode of PEI Group's new Commitment Issues podcast miniseries.
As the industry works through a backlog of unrealised assets, questions have arisen about performance, asset valuations and firms’ ability to acquire and sell companies in the time frame LPs have come to expect. For instance, average investment hold periods in private equity have now risen to around seven years, according to data from Bain & Company. Performance has to be even greater to achieve the same types of returns that private equity generated in past eras of cheaper debt.
As Burgess and Nowak explore, this can present a significant challenge for some firms, while for others – particularly where operational improvement is an established part of the toolkit – the game hasn’t really changed.
Chris Witkowsky: So often when private equity's big players meet, it's behind closed doors. These are the meetings that make or break investing relationships, where tough issues are hashed out between huge institutional LPs and the GPS hoping to secure their allocations. Ultimately, this is where billion-dollar decisions are made.
I'm Chris Witkowsky, global editor of investor intelligence with PEI Group, and in this new mini series, we'll be bringing these vital LP-GP conversations out into the open, getting both sides' perspectives on everything from the rise of continuation vehicles and the distributions drought right down to the fine details of fundraising.
Welcome to Commitment Issues from PEI Group. In each episode of this series, we'll be pairing an LP and a GP and inviting them to sit across the table from each other for a lively conversation moderated by me or a member of our investor Intelligence Team, as we do with all our products.
Here at PEI Group, we'll bring to bear our market expertise, powered by our proprietary data and privileged access to the people that matter most in private markets. The topic on the table today involves the changing industry and how LPs and GPs are adapting to some new, sometimes harsh realities. Exit activity and distribution levels remain subdued, and this state of affairs is keeping fundraising muted as LPs select their next commitments very carefully.
Big challenges face the industry as the question has to be asked, Has private equity seen its best days? Is the industry changing for good? What will the industry look like in the future? What will open up the clogged exit pipeline? How important is operational expertise in today's market. What are the changed expectations for private equity, including around performance we have with us today?
We have here David Nowak of Brookfield and Dale Burgess of Ontario Teachers' Pension Plan sat down to talk about these issues.
Dale Burgess: Thank you, Chris. It's nice to be here with you and David. My name is Dale Burgess. I've been with Teachers' for close to 30 years, believe it or not. While I am a relatively relatively new to private equity, having joined the team last year, I am not new to private investing. I've been investing in private markets, in particular in infrastructure and natural resources for over 20 years. So nice to be here.
David Nowak: And I'm Dave Nowak. I'm the president of the private equity group at Brookfield. I've been here for 16 years. I started my career as a teacher.
Chris Witkowsky: Interesting that I have to ask. I mean, just briefly, like, what was that path?
David Nowak: It was a bit of a random walk. I had grown up heavily influenced by teachers, and that sort I think, pushed me towards a career in teaching. And then I realized it wasn't necessarily my passion or a calling, as it is for most people, but I have, I should have elected to keep my pension. I taught for two years. I should have kept my pension in the plan. I think I took it out and it was about $2,000 so I would have done much better if I left it with you.
David Nowak: Dale, you should have that is one, I think, one of the major differences between being an institutional investor and being a private equity investor. There's no shortage of teachers that remind you who you were investing the money for, and my sister's a teacher, so she certainly reminds me of it every day. So no pressure, no pressure, no pressure.
Chris Witkowsky: It's interesting, though, David, that makes that makes that almost makes it a little bit more personal for you, in terms of, you know, clients that that you're investing on behalf of,.
David Nowak: Look, I think what we do is, I describe it as, you know, we are stewards of capital, and if you're fortunate enough to invest capital on other people's behalf, It's a big responsibility, and it's something that we take very seriously. I know the folks at teachers and the other pension plans do as well, and it does influence you. It influences you to not take on too much risk. It influences you to care. You know, you go to bed at night worrying about problems. You get up in the morning trying to solve those problems.
Dale Burgess: Yeah, I would say that also, that's a comment that's pervasive across most asset classes, across Teachers'. I think, generally speaking, being at a institution like Teachers' probably attracts a different type of investment professional that's here for a different reason, which, to be honest, that's kind of what resonates a little bit within the market when we talk to different people in terms of wanting to work with us, in terms of having a bit of a differentiated model and a different set of stakeholders that you're sort of investing on behalf
of so
David Nowak: Well staying 30 years like you must love your job. If you get people staying there,
Dale Burgess: It is, it is the people and I think, I guess the mission of the organization probably does that is the most unifying thing about working at Teachers' I would say Dave.
Chris Witkowsky: I think that often gets left out of discussions and critiques of private equity is the idea that firms are investing on behalf of these constituencies. And you know to lose on behalf of those constituencies is not something that firms are looking to do. And so that kind of simplistic critique of PE as just sort of coming in and stripping assets and, you know, flipping and things like that. It just never made a lot of sense to me. I know it can happen. But the idea that, you know, on the LP side of things, you have these beneficiaries that are really relying on private equity to make these returns, and that's something that often gets left out of the discussion.
David Nowak: I think, yeah, I think, you know, Dale makes an interesting point about culture, and I think culture matters, and firms make a decision early on. Are they interested in longevity and building a franchise? And we can give you lots of examples of firms that were privately owned, GPs that had two, maybe three vintages, and the founders kept all the carry. They made a boatload of money, and they moved on with life. And I think that's a bit of a stain on the industry, because I think there are many people like the pension plans, and folks like ourselves are investing in our seventh fund that have been around a long time.
At our firm. One of our big differentiators is we, Brookfield, are the largest investor in every fund that we have. So we're 30% of every investment. You know, that gives you exceptional alignment and really differentiates from people that are really raising capital for a management fee, and they carry, right?
Chris Witkowsky: I mentioned here served up in the beginning, the kind of changing role of private equity. And so that's a question here is, what is the role of this asset class in the portfolio? Has it changed? What does that look like going forward?
Dale Burgess: At Teachers', we invest in private equity for one reason, it's to earn excess returns over what you could earn in the public markets, and to get that sort of excess return premium.
So that is one of the sort of major sort of things that sort of, I guess, different between being a GP, quote, unquote, and being an institutional investor who happens to be investing in private equity as sort of one of their asset classes that they're investing in. So I think the when you ask the question, Chris about the role of how has shifted, I don't think the role of private equity, at least in the context of what it's meant to do, from a portfolio construction perspective, has shifted. I think what has shifted, though, is how different people are trying to optimize whatever box they're given, from a private equity perspective, on what they are doing to optimize within that box.
So from a Teacher's perspective, if I had to say one word to describe our approach to private equity would be focus. We are absolutely laser focused on delivering as much value as we can out of the existing portfolio of companies that we have right now. We are absolutely focused on exits, which has been challenging in this environment, and sort of doing everything we can on there. And we are focused on what we want this portfolio of private equity assets to look like a few years down the road.
David Nowak: And maybe Chris, I'll pick up on that private equity has historically been the highest returning asset class. Question is, is history repeat itself? And there's a lot in the press about, you know, the fact that a lot of the financial engineering tools that people use in the past are not available going forward. And a lot of the sort of say zombie funds, but underperforming strategies that people once thought were really enduring and proving not to be so enduring.
And so from our perspective, we don't think that the opportunity is lost. We think how you go after it matters. And I think manager selection is really important, which plays into Dale your point on focus, picking somebody who has a really clear focus on margin expansion, not multiple expansion, margin expansion. And so for folks like us, 50% of our returns have come through better operations. So for guys like us, this is the perfect environment to earn our returns.
Dale Burgess: Yeah, I could not agree more with that. You know, I think, I think we've had a long, as you said before, David, we've had a long history in the asset class. It's been a successful asset class for teachers. You've had a 16% return since we started investing in private equity. But if I look forward, I think about what the expectations that are going to be changing are in private equity, I do think there's a general acknowledgement, even outside of private equity, that the sort of golden age of private equity, in terms of some of the tailwinds which had previously enjoyed, in terms of cheap debt valuations, which could only seem to go up one way, are kind of gone. And I think as a result of that, people are moderating their expectations in terms of excess returns they can expect on a going-forward basis from private equity, because at the same time, they're recognizing that the way those returns were generated in the past is not going to be the way they're generated in the future. And sort of, as you said, it's not about those financial levers anymore. It's more about like, what are you actually doing to kind of improve the underlying business of a portfolio company? And actually, do you have the team of people that's actually capable actually capable of actually working with a management team to actually do that?
David Nowak: That's an interesting point, because I was at a panel a few weeks ago, and I actually started to chuckle on the panel because everybody was talking about their operating capability, and I was scratching my head saying, I'd love to actually look under the hood and see who are these people that. A part of your team that have done it like in our model, we have the traditional skill sets of investment bankers, lawyers, management consultants, accountants, but then we also have men and women who've actually run businesses or come up through industry. Often, they're engineers, and they sit in as part of our investment team. So it's not often an advisory board. They're not people we call when we have trouble or we ask for advice, they actually work on the deals. And so what we do is we have this joint sponsorship model. So I'm a financial you know person by background, and when we actually bring an investment forward to Investment Committee, you have to have one financial partner and one operating partner sign off on it, so you get that joint accountability.
Chris Witkowsky: We were talking about kind of operators at the firm, working alongside financial folks. And I was wondering about that, that model, and how those kind of operating professionals that are working through the life of the investment, how do they assist in kind of the exit, in the exit outlook, what is their role in that?
David Nowak: So from our perspective, what we do is we re underwrite every deal as part of a annual business planning session, November of each year. And the question we always ask is, you know, because what you're doing is you're implementing operational improvement, it might take some time for that to actually translate into free cash flow. And so the operating people generally, by nature, never want to sell things, because, you know, they've it's like fixing a car. It's running beautifully. Why would we ever sell it?
But we are in the recycling of capital business, and then you worry about macro events happening where the market's then pulled back, you worry about disruption in the industry. So we put all that into the mix, and we have that year-end review where we say, where are we today? Where do we think we're going to go? Is it additive or incrementally improving the return profile that gets us a better return?
And so you have that honest discussion. But generally it goes back to that joint sponsorship model. You get the financial person and the operating person both getting generally to the same headspace. It is tricky. Timing exits, right? And the saying, I love JP Morgan once said, it's funny, I got wealthy selling early.
And so it's, it's okay to have a three times multiple of capital and selling, and we sell a lot to strategics. And so sometimes strategics go in and they drive synergies in the investment, and maybe we made 3x and they go on to do quite well. And I think, I think if you have that reputation of being a good counterparty, it's back to Chris, your earlier point about not sort of stripping out, you know, all the assets in a business and giving somebody a carcass of a business. I think you do want to be known as somebody who builds good businesses, and if you drive operating improvements, you generally hand people a better business.
Dale Burgess: From a Teacher's perspective, as you talked about, Dave, like we've we're spending a lot of time on exits right now, making sure that we, whenever we bring an asset to market, we are having a global conversation across the entire team in an exit forum. How would this has to be perceived in the market? What are your if you were selling it to your colleagues, what would they what would they actually say? But I would say the sort of main reason why we haven't seen the exits that we were hoping to see is because valuations just haven't been reset based off of what the market will bear right now. So certainly at teachers, one of the things we've been spending a lot of time on is properly marking to market our assets and making sure that our assets truly reflect at the end of the year what we actually think we can actually transact them for in the market, because that ultimately is going to be the biggest, probably hurdle, potentially, if you were actually aren't able to sell at a valuation that you think is justifiable.
David Nowak: And I imagine it's easier when you're new in the role, because they're not your deals. And so you can go in and actually bring objective questions.
Dale Burgess: There's an element to that. But at the same time, like I'm trying to make sure that some, some of the things we've looked at with a harder lens are deals that were done in that 2021 2022 vintage, which I think everyone probably is sitting on assets and in that part of their portfolio, that they could probably take a double click on the marks and say, Have I truly reflected what's going on since I bought that asset, which I think everybody would looking back now, would say the top is the top of the market.
David Nowak: What's interesting in exits? I think we'd all agree, the three of us, that probably the highest and best use is a strategic acquirer of a business. And one of the things that we try to do is get out to strategics early on in our ownership and educate them over a three to five year period. I think people don't do that well. I think what a lot of people do is they focus on the performance, then they hire a banker. Banker gets the book, they call people, including strategics, and then they expect that the strategic is going to make a big decision in a six to 10 week period.
So what we've tried to do is get people to understand what the plan is. We show them directionally, how we're getting to the top right of the page. We check in with them once, twice a year, tell them how it's going. And we we say openly, we buy and sell assets. And if you ever want to talk to us about this, you know we're here to listen. And sometimes they preempt, like sometimes, you know, it'll be a strategic imperative and they'll be cashed up, and somebody at the board wants them to do something.
But at a minimum, what it does is, when that banker gets hired and they call on that head of corporate development, they're smart, and they're hitting the ground running, and they have a point of view of whether it's something that they might actually want to acquire. So there is something that's sort of the art aspect of the deal.
Dale Burgess: Yeah, absolutely. And they feel there's a people aspect of that as well, because anybody feels they've got an inside track, feels like they've got a bit of a special look at this. I mean, the only other comment I would make is, again, looking at a large portfolio of private equity, there's always a reason not to sell something at this point in time in the market, and you have to kind of take a step back outside of the particular challenges one asset is facing, and say there is an opportunity cost of not selling an asset as well, and that needs to be factored into the decision to sell or not to sell, like waiting for a turnaround to happen may not necessarily be the right decision, if that capital can be better deployed, either in private equity elsewhere or in another asset class within the fund. So that's another lens we're trying to look at exits with as well, to say, earning a sub optimal or earning a lower than expected private equity return. There is a cost to having that set in your portfolio.
David Nowak: But you know, it's interesting is we're sort of still the start of 2026. I remember sitting the start of 2024 having a conversation like this, and the optimism that everybody had the market's going to turn right. And what the credit markets had opened up. Rates were better. People had reduced their interest expense. They'd done some operating improvements over the recovery from COVID, you know, the levels had got back to more sort of normal pre covid era. And then you get to 2025 and 2024 was a slow year. 2025 everybody was adamant this would be the year. And then Liberation Day happens. And the world, you know, gets a bit upside down. And then you come into 2026 and a month ago, I think everybody would have said the same thing, this will be the year. And you look at the volatility in the market the last couple of weeks, and the uncertainty of what's going on geopolitically, you know, I think the underlying businesses and the profitability is quite, quite good. But what's got people troubled now is the recession risk. Like, I think there was a period in 2024 people were worried about recession, and everybody sort of breathed easier. Businesses were more profitable. Everything seemed to be in balance. I think right now it's a really, really tricky time.
Chris Witkowsky: The average hold period is now up to seven years. What do you think opens that up? What do you think you know, starts that flow again? Continuation vehicles, David?
David Nowak: Maybe, I think the other element of there's a bunch of noise in there, there's there's the fact that some of these businesses may be underperforming, and people are holding on, hoping for another vintage and a fundraise and multiple recovery that's possible. There was an element too, where people were starting to realize that they could improve business through better operating improvements. And so they were making up last for last time, or the return degradation of time that you talked about.
The other element, frankly, was LPS weren't allocating, you know, like people don't talk much about this, but if you're a GP, and you're looking at your portfolio, and you say, look, am I prepared to go out in the market and maybe take, you know, something lower than what I think it might be okay if I'm prepared to do that, but they're not going to allocate, then what do I do for two, three years? So I think they're now the now the LPs are allocating. I think the LPS have come back on side and are under-allocated to PE many of them are trying to sort out the software world. You know, the AI impact, but also, you know, software has been heavily hit in the last, you know, couple of months. But I think generally, when we talk to folks like Ontario Teachers, people are looking to put capital to work.
Dale Burgess: Yeah, absolutely. And that's exactly where we're at. We're open for business. I think you're seeing more convergence of buyer and seller expectations in terms of price. I think there is more there has been a lot of pressure that LPS have been putting on GPS to actually sort of show that level of realizations. If you put yourself in a GP type lens. There's two different components to it. If you're fundraising, you're trying to show a good return to your investors, but you're also trying to show DPI to investors as well. I think some of that still exists, but some of it sort of slowly moving away and again, from our perspective, again, any LPs perspective, or any sort of institutional investor perspective, you are trying to make sure that you are not just looking at it from the perspective of a single performance lens. You are trying to look at it through the lens of like is that capital that could be used better elsewhere?
Chris Witkowsky: Do LPS need to adjust their expectations for private equity? Do they need to now sort of adjust their expectations around hold periods, distributions, even performance expectations. Does there need to be kind of a reset in what LPS expect out of private equity?
Dale Burgess: I've said before, I wouldn't say people are changing their expectations dramatically on private equity. I would say people are certainly lowering their expectations in terms of what the excess return premium you can earn on private equity in relation to the other passive benchmarks that are out there from a return of capital perspective, I think that's a legitimate thing that all LPs are going to be asking for to have that some, to have some level of capital recycling so that you could sort of take the money Back, decide what else you actually want to do with it. So I don't think that's necessarily changing.
David Nowak: Yeah, I don't think that things have changed. I think manager selection is really important, if you get that right. I think what historically happened in terms of timing returns is somewhat predictive of what you'll see in the future. I think what gets lost in this conversation is the impact of a global pandemic where economies around the world were shut down. Like, like, like, I think this wasn't a recession. This wasn't just, you know, a recession $100 oil, like, typical economic shocks that people had been used to, like, this was a never seen before economic event. And what it's done is it's, it's sort of gummed up the system, or the regular, you know, supply chain of what, what Dale and I do, and so once that works its way out, which is at the heart of your question, Chris, is, you know, when do we actually get through that? When do we clean the books and when do we get back to sort of more normalized investing environment? It's coming. Some of it started, but think like we came out of this pandemic. You dealt with inflation, you dealt with rates. Now we have geopolitical uncertainty like I haven't seen in my lifetime. Like, you know, I think about whenever there's been geopolitical conflict, it's been like one at a time, maybe two. Now it's like multiple conflicts in multiple regions. It's just there's a level of volatility in the market that has never been seen before, but it doesn't seem to be impacting the markets in the way, up until the recent one with oil in the fear of recession, in the way that you would have thought.
So to me, what that shows is that investors are normalized to the unpredictability and to the volatility. There's a lot of capital that needs to be put to work. And so from from our perspective, what we've tried to do is stick to our strategy, which is find businesses that are misunderstood, that you think you can operate more effectively.
That's really what we do. And the good news on the pandemic, my personal view is a lot of companies got lazy. I agree with your opening comment, Dale about being human or having humanity with your workforce, but companies that got penned in on a three day a week, you know, in office strategy and two days from home, they're not efficient. I mean, that's my own perspective. And the companies we've acquired that have those cultures, the amount of operational improvement and efficiencies we've been able to drive never been seen before.
Dale Burgess: Yeah, I think again, if you think about the future of the industry, if you want to think about it from a bigger picture perspective, like any institutional investor that's invested in private equity, it's not a liquid asset, right? It's not an asset you trade in and out of, like fixed income or public equities. It's an asset class that and thank you for your kind comments. David, earlier, you either you're in it or you're not in it. We've been in it as teachers for 30 years. We will hopefully been in it for another 30 years. It's a huge team of people. You have to, actually have to kind of be effective at sort of doing it. So you either take the decision you're in it or not, your questions about what's changing in terms of liquidity, I think at the end of the day, performance is performance, right? I mean, if you are putting up numbers that justify the allocation to private equity. You know, people will take a longer term perspective, certainly an institution to kind of say, like, do I want to have that my portfolio, but we're fine to hold on to things for longer than we otherwise would have if the performance is actually there where things start breaking down, as if you're holding on to things that are not performing, and you have no other ability to kind of get the capital back off the table, to reinvest it somewhere else.
David Nowak: And look, LP influence has certainly increased, right? I think of when I started, you know, you would go to an LP for, you know, co investment interest. Now it's co underwrite. And whenever we look at stuff with Ontario teachers, it's, you. To be upfront early days, the the LPs ride side by side with the GPs. They bring real insights, and they do real work. And so I think, I think what, Chris, what's really interesting about, you know, where private equity is today is, is the partnership model is very reciprocal.
There's a lot of back and forth between LPs and GPS, talking all the time, sharing information, looking at deals together. And so I find there's more transparency than there was even 10 years ago.
Dale Burgess: I don't have the length of perspective that you do, Dave, but I do actually agree with that comment and you there's a lot of people always ask, What do LPS look for in GPS? I mean, I think it's I think it's a very fair question to say, what do GPS look for in LPs?
Because while, typically speaking, the fundraising environment is challenging for a good performing manager, they can decide who they want their LP stack, right? So from our perspective, I think about that a lot. I think you need to come in with a little bit of a self reflection of what it is you are bringing to the table, other than just capital. So from our perspective, it's transparency, trying to make sure that we are being as upfront and transparent as possible. A quick no is better than a long maybe.
In a lot of situations, when people ask for what you said in terms of co-underwrite and co-investment, you can ask for it, but the question is, do you have a team of people that's capable of actually, like, working side by side and delivering on it in a partnership type model? And then the final thing is, do you have an approval process which actually allows you to, sort of, like, be quick and nimble and agile? And certainly, those are sort of questions. We are trying to make sure it gets out there and say, Look, you know, we're not just a source of capital here. We also want to make sure that we are being a good partner, because you have other opportunities to partner with different people
as well.
Chris Witkowsky: Both of your institutions have been around for a long time and will will be around. But do you see, I don't know, five years from now, a smaller private equity industry? Do you think that this industry is going to shrink because of what we're
going through right now.
Dale Burgess: I don't, I don't think it'll shrink in terms of absolute dollars. I think there will be a consolidation of those that are more successful and naturally are leading the race. And as we've already seen it right now, there will be, unfortunately, casualties that sort of happen, but that's probably a natural course of any asset classes evolution. But I don't see the industry shrinking or certainly going away. I just see more of a consolidation and more of a survival of the fittest type mindset.
David Nowak: There's a stat that people like to quote on this topic, where they talk about businesses that have north of 100 million of revenue, I think it is our 85% of them are private. So I don't know how you avoid private equity, given that you know, there's, there's a massive tam that people want access to. And I think, you know what Dale said earlier, I think needs, you know, to be highlighted. In private equity, you can actually do things that are better for the business, because you're you're private and you're not managing your decisions on quarterly analyst calls.
And so often, you know when, when we get a business that's underperforming, we actually shrink the business, you know, we figure out, we go in and we do a bunch of analysis of each of the SKUs. What happens is businesses grow. They chase what I describe as bad revenue. They're fixated on showing growth, and so they get a nice revenue kegger, but their actual margin starts to compress because they're bringing on not just low margin business, sometimes it's negative margin business, right? But it looks like it's all packaged nicely, because in the public markets, you're talking about growth every quarter. So what we do is we look at every SKU, and we do a fully loaded analysis about whether it's profitable or not profitable, and then if it's not profitable, you have to ask the question, but is there a reason why you have to sell it in order to get people to build the basket to buy the other more profitable stuff. If the answer is no, then you got to discontinue that product. And so often we shrink it.
You can't do that in the public markets, like your stock will it will plummet.
Chris Witkowsky: Okay, that's all for today. We could have potentially talked all afternoon on these issues to hear more episodes from this mini series as they're published, subscribe to private equity spotlight. Wherever you get your podcasts, visit Pei group titles including privateequityinternational.com, for more coverage. There, you'll be able to explore our LP database, where you'll find the investment strategies and commitment data from more than 15,000 LPs, as well as over 19,000 managers, 70,000 private markets funds and over 200,000 investor commitments.
This episode was produced by James Sutton, Natalie novakova and Graham Kerr of PEI Special Projects team, and edited by Eric Fish. I'm Chris Wikowsky with PEI Group,
thanks for listening.
What a fantastic discussion on private equity between a top LP and a top GP.
The insights Dale and David share here are truly incredible.
Dale may not be a veteran of private equity like David but he's a veteran of private markets and understands focus, execution and exits are what it's all about.
I embedded it below and you can also listen to it here.
I recently discussed why Canadian pension funds are grappling with private equity, but I think this discussion adds so many levels to the discussion that you need to listen carefully to their comments which I transcribed above (not perfect, best I can do using Otter.ai).
I will edit it tomorrow to highlight the important passages because there are so many, I only highlighted a few above.
Below, listen to the podcast featuring Dale Burgess, Chris Witkowsky and David Nowak.
Also, Brookfield Asset Management's David Nowak on how to build an "earn your seat" private equity firm. What a smart investor, if you're young and working in his team, count yourself very lucky!
Comments
Post a Comment