Investing in a volatile world
How does Jo Taylor, President and CEO of Ontario Teachers' Pension Plan, approach investments in a world marked by disruption?
With assets under management of approximately C$250bn (circa US$188bn) and an ambition to grow assets to C$300bn by 2030, OTPP has been a strong proponent of private markets investing for many years. The pension fund occupies an influential position in the space – it has C$60bn allocated to private capital globally and over 100 investment professionals dedicated to the asset class. So how does its CEO and President view the market today? And what can be expected in the near term? Here’s what he had to say.
“As an LP, we work closely with a carefully selected group of partners where we can be involved co-investors. Since 80% of our investments in private markets are made directly by our own teams, we are also, on occasion, a competitor to the partners that we work with - which is not an easy feat to pull off. To succeed, we need a close working relationship with the GPs that we support, and clear alignment on the transactions that we and our partners want to make together.
Where we can, we look to provide creative solutions for our partners to help make transactions happen. Given today’s cost - and availability - of lending, it is difficult to get transactions done. More recently, we have tried to broaden our options by exploring acquiring businesses using little or no debt.
“Another challenge today is the exit environment for portfolio companies. One of the areas we have been focusing on is to assist partners to find liquidity solutions. One option here is for us to invest in the debt and mezzanine segments of an investment as an alternative to the equity component. Equally, we can retain our economic ownership in an asset once it has been sold by partners as we are a patient investor looking to secure returns over the long-term.
As an alternative to fixed income, we have been investing actively in both infrastructure and real estate. We like infrastructure because it offers annual inflation adjustments through embedded contracts with customers, many of whom are governments. In 2022, we also looked to investments in natural resources, commodities and gold as further protection from inflation. Finally, we’ve been building our exposure to credit, which now accounts for around 10% of our assets.
“A key issue for us as a defined benefit pension plan is inflation, as our liabilities get adjusted each year by changes in inflation - in 2023, for example, we increased benefits to members by over 6%. At the end of 2022 about half of our assets were split equally in the traditional asset classes of equity and fixed income. Within equity, the majority (70%) was held in private equity, but the other half of our balance sheet was dedicated to areas designed to provide strong inflation protection as well as diversification.
“Over the last ten years our annual returns in private equity have been around 17%. That has been secured through co-investments with partners, and our own direct investments. That said, we also recognise that some funds operate in geographies or niches where they can make better returns than us, which makes them a logical partner for us. We also use fund investing as a bridge to a sector or geography that we want to explore later. We recently set up an office in Mumbai, for example, following a five-year period investing in private equity and credit funds targeting India.
“Over the last ten years our annual returns in private equity have been around 17%. That has been secured through co-investments with partners, and our own direct investments.
“As a mature pension plan with negative annual cash flows (between contributions made, and the benefits we pay out each year), we also need to be reflective about what risks exist in our investment landscape and what might be the catalysts and shocks to confidence are that haven’t been built into everyone’s thinking. Our current outlook is that there are risks that may undermine investor confidence in 2023. The situation in Ukraine has yet to be fully resolved, and it’s unclear whether there will be adverse events stemming from this beyond the availability of certain food stocks and fertilizers. Food and wage inflation is also likely to be pervasive, as will the cost of a global transition to lower carbon intensity fuels and revised near shore supply chains.
Our current outlook is that there are risks that may undermine investor confidence in 2023. The situation in Ukraine has yet to be fully resolved, and it’s unclear whether there will be adverse events stemming from this beyond the availability of certain food stocks and fertilizers.
“Against this backdrop, as well as managing risk, we try to use our agility to pivot to opportunities that will emerge from the changing landscape. We look for businesses with growth tailwinds. We believe one limb of growth will be to support businesses with sophisticated plans to progress their exposure to climate, diversity, and making a positive social impact in their local communities.
We are strong advocates of businesses with disruptive science and technology.
Today, this would encompass areas such as the much-debated generative AI and medical technologies. A key discussion topic for us is to decide whether these opportunities will be monetised by newly formed, and more early-stage companies, or more traditional incumbents, such as Microsoft or Pfizer.
“While there are risks in the market today, avoiding all risk isn’t a credible option. To be a successful international investor you need firstly, to establish your own risk thresholds and then, to ensure you can accurately assess, and get fully compensated for, the level of risk being taken.”
As an LP, we work closely with a carefully selected group of partners where we can be involved co-investors. Since 80% of our investments in private markets are made directly by our own teams, we are also, on occasion, a competitor to the partners that we work with - which is not an easy feat to pull off.To succeed, we need a close working relationship with the GPs that we support, and clear alignment on the transactions that we and our partners want to make together.
