The head of one of North America’s biggest investors in private markets wants to cut its reliance on buyout firms and do more dealmaking on his own.

Jo Taylor, chief executive officer of Ontario Teachers’ Pension Plan Board, has plans for the $242 billion (US$189 billion) fund to buy more controlling stakes in businesses directly, so that it can save on fees and keep a closer eye on environmental, social and governance matters.

In a rare interview, Taylor said OTPP is looking more closely at both the returns its private equity portfolio generates, and whether it can have “sufficient influence” at the companies it invests in.

“One of the advantages of being in a control position is that you can actually have a consistent view of how we interact with the businesses,” he said. “That’s quite hard to do when you have 5 per cent to 10 per cent in somebody else’s private equity deal.”

Pension funds have been upping pressure on asset managers to apply more ESG awareness when investing their money, keen to show they’re not just paying lip service to issues like climate change and social mobility. OTPP has put these topics high on the agenda when dealing directly with companies, according to Taylor. 

“We have come out with very clear climate reduction targets,” he said. “We come out with very clear diversity, equity and inclusion targets in terms of gender participation on boards and how generally governance works around the businesses that we invest in.” 

OTPP manages the retirement pots of teachers in Ontario. Net assets under management rose 10 per cent in 2021, a year in which the fund stepped up efforts to buy controlling stakes. Notable deals in Europe included acquiring a majority holding in plastic packaging producer Logoplaste and 30 per cent of insurance broker Siaci Saint Honore.

Taylor said returns for 2022 may not hit last year’s levels in a more challenging economic environment of rising inflation, rates and market selloffs. 

COLLUDE, COMPETE

By going direct, instead of via a fund managed by a buyout firm, Taylor said OTPP is also able to save on the “significant” fees that exist in an industry known for rewarding itself generously. Private equity firms have historically charged a 2 per cent management fee and 20 per cent on any performance above a certain threshold. 

The trend toward more direct and control deals by large pension and sovereign investors has picked up in recent years. While historically happy to invest for small stakes with private equity firms, also known as GPs, these funds have built up internal buyout deal expertise.

Singapore’s state-owned investor Temasek Holdings Pte bought testing company Element Materials from buyout firm Bridgepoint Group Plc for US$7 billion earlier this year, while Brookfield Asset Management Inc. this week agreed to acquire emergency household repairs provider HomeServe Plc for £4.1 billion (US$5 billion).

If OTPP follows through on the pledge to bypass private equity funds on more deals, it will add another competitive force to the likes of Blackstone Inc., KKR & Co. and Apollo Global Management Inc. in the hunt for takeover targets in private and potentially public markets. 

To be sure, pension funds still see private equity firms as key to hitting their alternative investment allocations.

“We live in a world where we collude and we compete with others and that’s quite a hard thing to pull off,” Taylor said.

FUND CYCLES

Investment firms have for years enjoyed a very favorable environment, with ultra-low interest rates spurring institutional money to chase higher returns in private markets as valuations boomed. New and bigger buyout funds have come to market quicker than ever, with the cycle shortening from a typical three-year period to 18 months in some cases, according to Taylor.

“I think it’s always slightly egocentric,” he said. “I do wonder sometimes whether it’s necessary.” 

Taylor said raising larger pools of capital at a faster rate and a higher cost of entry, while delivering attractive returns, will become harder because of rising interest rates and previous investment mistakes.

He said he expects the private equity funds that OTPP does invest in to make returns and also offer the opportunity for co-investment.

“If you don’t deliver that, we don’t do the next fund,” said Taylor, a former executive at London-listed private equity firm 3i Group Plc. 

Looking ahead, OTPP is considering opening an office in India as part of its expansion into fast-growing emerging markets and is also looking to set up a credit investment team in London.

“We love the UK,” Taylor said, describing the market in the country as “probably the most predictable” market in Europe.