Ontario Teachers just announced they're winding down their direct PE strategy and moving to a more passive model - and the same for their public equities strategy.
Are Canadian pensions realizing they can't compete with fully built out GPs and/or beat the market?
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imo i think its because their expenses have been scrutinized by the public, if they are doing direct investment, expenses would appear higher than just giving the money to a GP. Also lot of politics involved on whether pensions are putting money into Canadian businesses, giviing money to GP gives perfect excuse that they dont have much control over where the money is allocated, I'm not an insider but this is my speculation
My biggest takeaway on this headline is it underscores the importance of human capital in the industry. LPs often complain about the high fees, but believe it or not, the good GPs deliver a great return on those costs. If an LP thinks it can hire a world class team, then by all means go direct. I will tell you a huge percentage of our fees go to retaining people. If my fees were cut in half, I could not keep the people I need to deliver top returns.
Cant expect top quartile returns with bottom quartile comp
They could be making bigger, more beautiful investments, if they were deploying capital from the 51st state. Much more opportunity!
Nope, sorry, it's none of that. Before the GPs here start self-placating themselves, here's the real story:
The move to more passive is really a function of the concentration of the portfolio under a direct model. When you have a funds + co-invest model, you might have exposure to a thousand companies through your funds portfolio and I dunno, 50-70 maybe through your co-invest portfolio. That portfolio may generate mediocre returns but the risk of blowups are practically zero. If you then move to a direct model, you need to hire a lot more expensive talent and with the same asset base, now you may only have exposure to 20-40 companies in total. A blow up is now more consequential both reputationally and to annual and long-term returns that people get paid on. Exact same deal at OMERS.
Why did it take them so long to figure out that consequence? Pretty obvious no..?
Corporate inertia
CPP made this move two years ago. Not surprised OTPP made the change
Did they?! I swear they still have a pretty beefy direct PE team?
It’s pretty comical that they were interviewing for their direct PE team less than a month ago. Sucks for the people on that team long term. I’m sure you’ll start to see an exodus of these folks.
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Nature is healing, next step is realising most private markets products are proper garbage vs public products and cutting allocation to “alternatives”. Any views on whether the other Canadian pension funds will follow suit?
You can actually construct a proper portfolio with asset class, geography, and vintage year diversification if you do a funds programme with co-investments to blend down fees. OTPP's direct deals often tended to be venture/growth deals -- the late-stage focus that their check sizes allow probably hurt returns quite badly given the recent market downturn in late-stage venture.
Direct deals can be lumpy and deployment can be sporadic -- if you happen to catch a bad vintage then it's belly up. Committing to funds, even if one fund has lumpy deployment, with a portfolio of funds it would be smoothened out. Vintage year diversification is incredibly important for consistent returns
Thoughts on if I accepted a summer internship from them on their direct PE team?
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Any idea what is happening with their Natural Resources group? It operated separately from the other PE teams but was still under the general PE umbrella.
Any read throughs to players like mubadala and temasek that seem to be gp-like in their direct strategies?
Bump - interviewing with one now
Interviewed for an Analyst position in their Private Capital team in London 2 months ago...
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