Q&A - Martin Day, Managing director, OMERS Private Equity

1. Given the downturn in the markets, would you as an LP do anything differently now going forward? What advice would you give to a first time investor?

I wouldn't necessarily advise anyone to do anything differently from two years ago. You have to view private equity as a long-term asset class and build up a balanced portfolio with sub-asset allocations that are appropriate for the long term.

I am a big believer in the fact that you don't market time in private equity, particularly when fund investing. You're making a commitment on the basis of what you think of a manager as an investor over a period of five years. No one knows what will hold three months from now, let alone in five years. That is why your portfolio has to be well-diversified, whether it is based on the type of private equity assets, geographic region, mature or new managers, etc. The biggest mistake an LP can make is to look at the allocation map quarterly and adjust accordingly.

The one thing that OMERS and many other LPs did learn is to be more disciplined about one's allocation map. During 2006-2007, too many people got caught up in the flurry of fundraisings for large and mega buyout funds. One day, investors woke up and realised that their invested dollars in the mega space was greater than they had originally planned. This was due to the frequency of fundraisings, as well as the speed in which capital was invested. Therefore, we have learned to watch the pace of fundraising better and invest more carefully, using more discipline and discretion.

2. What would you say is the biggest change in terms of how a GP treats its LPs now?

From an LP perspective, there is a massive difference in terms of how LPs are treated. The pendulum has swung the other way. LPs are tight with capital (or they have none) and GPs are aware of that, making them hesitant to come back to the market and ask for more money.

There are endless issues to be dealt with in managers' portfolios at the moment and the frequency of interaction between LPs and GPs has gone way up. Fund managers are now feeding information to their investors in bucketfuls. They have to make certain LPs understand how companies are faring, as despite low valuations, businesses could actually be performing according to plan. Two years ago, some GPs would send a fax to potential investors for them to write down how much they want to commit and to sign off on LPA terms before even seeing them. This is clearly not going to happen now.

GPs are now having friendlier chats with LPs with regards to investing and feeling them out about their terms. Management and transaction fee issues will come to the forefront, as these terms had become unreasonably generous to the GPs.

3. What is more relevant when assessing the merit of a GP, their track record or the current underlying portfolio?

Really, the answer to this question is both. The track record is of course critical, but track record is the history, and current portfolio is the now. You have to try and reconcile this in some way. If it is the same people running the show, then you have to test what they did in the past to what they are doing now. This requires looking at the current portfolio in great detail and seeing how the GP is managing its investments in this environment. This involves comparing companies to others in the same sector and asking how the manager reacted to current circumstances. Did it cut costs? How quickly?

If historically the GP had a great track record and its current portfolio is awful, then perhaps the manager isn't really that great, or maybe it has performed relatively well given the environment. The current portfolio is one great way to look back and really assess a GP's track record.

4. What is the best indication of the true skill of a GP - cash in vs out in the last five years, or current performance (realised and unrealised)?

We absolutely look at the realised track record of a GP over the last 10-15 years. But there are more and more unrealised portfolios because of less time between fundraisings.

We examine the unrealised part carefully and look at each company as if we were going to buy it ourselves. Then we compare what we think it is worth to what the GP thinks. We also look at the manager's business plan at the time of the deal and see how it has implemented its strategy. If a GP is sitting on a company and not selling, then we would have to find out why.

With regards to cash in vs out in the last five years, we don't really use this specifically as an important metric.

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• UK / Ireland