Q&A: LPs take direct route

Having just completed your first European buyout and fresh from the Simmons deal in the US, it is clear that Teachers' is bulking up its direct investing activities and making this a point of focus, as opposed to purely investing into private equity funds. What is the basis of this decision and how do you plan to implement the strategy?

Teachers' Private Capital's investment strategy is to invest in control investments, funds and co-investments, all of which we have been doing in North America since 1991. We have invested in funds and co-investments in Europe since 1992. In 2007, we made the long-term decision to open our London office in order to target control investments as a natural evolution of our global investment strategy, keeping exposure to all three investment styles at the same time.

As the private equity team of one of Canada's largest pension plans, what are the major differences, if any, between what Teachers' Private Capital does and the remit of a traditional private equity firm?

We look at target risks and returns in a very similar way to other PE firms, so will look for similar types of businesses to invest in. However, because we do not manage any external funds, we have the benefit of flexibility in how we can invest. For example:

1.) While we have similar investment objectives as other PE houses when we acquire a company, we are not subject to the same external timing pressures as other PE houses (whose funds have a fixed life) in terms of when to exit. This means that if we continue to see significant opportunities in an existing investment, we have the flexibility to stay in for longer.

2.) We can invest in both minority and majority transactions without any restriction of what proportion of our ‘fund' can be in minority positions.

3.) We are able to invest in different parts of that capital structure, if that helps to get the deal done, which is useful in the current environment.

4.) We have greater flexibility in the amount of equity that we can invest in any single deal with no fund-imposed cap on maximum equity cheques.

In the recent Acorn deal (buyout from Phoenix Capital Partners), it is noticeable that Ontario Teachers' is one of the largest investors in Phoenix Equity Partners. Do you think existing GPs will be a good source of dealflow going forward? How do you find competing against other GPs in this scenario?

Our interest in Acorn stemmed both from its robust business model and significant growth opportunities, as well as our ability to make use of the flexibility of our capital to support the company going forward. Phoenix ran a professional and open auction; our bid was selected fairly, based on the price we offered and the certainty that we could deliver on the bid. We source deals in the same way as any other PE shop ( i.e. a combination of personal networks, desktop research, direct calling and intermediaries).

Do you think LPs will move more into the direct investing space in the future? If so, why, and what are the benefits of this?

There are a number who are trying to do so and for many individual reasons. However, it is a very different skill set to fund investing and one that Teachers' Private Capital has been developing over nearly 20 years. As an institution, the Ontario Teachers' Pension Plan has a global perspective. Canada is a relatively small market for a fund of our size and we look for the best opportunities in the world to earn returns for the pension fund. Part of that is broadening our direct investment base and gaining better access to what we see as an attractive market.

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