High above Toronto's financial centre, on a painfully cold day, Erol Uzumeri is passionately explaining the strategy behind Teachers' Private Capital (TPC), the private equity investment arm of the $106 billion (€69 billion) Ontario Teachers' Pension Plan.
The organisation's blend of private equity fund commitments, co-investments and direct investments is one that evolved early on, he says, practically as soon as the private equity programme was launched in 1991 and just a year after the pension itself was founded.
Uzumeri attributes adoption of the GP-LP hybrid model to Bob Bertram, the pension's executive vice president of investments, and former chief executive Claude Lamoureux.
“They had the idea that we should be active investors, not like your Dad's Cadillac, your regular pension plan,” Uzumeri says.
Crucial to adopting the pioneering strategy was not only innovative leadership but a governance model that included a board comprising titans of industry well versed in business and investment matters, Uzumeri says.
“We started testing the waters in private equity and in fact, one of the most important things is in our first direct deals, we lost money,” he says. “That's a very fundamental sort of turning point in some people's experiments in private equity. The first time they do, for example, a co-investment, if they lose money, the boards will often say, ‘This is too risky, shut the whole programme down’,” he says. “And to our board's credit, and to Bob's and Claude's credit, [they said] ‘we're going to lose some money, but we need to stay the course and continue on’. And as a result, our long-term returns have been great.”
PROFITING FROM PERSEVERANCE
TPC's investments represent roughly 8 percent of Teachers' total assets. In 2006, the most recent year for which data is publicly available, the private equity programme had a one-year rate of return of 26.9 percent, outperforming its benchmark by 7.3 percent and adding $350 million to the pension's coffers, according to its annual report. In the preceding four-year period, private equity returned 33.3 percent, well above its 21.4 percent benchmark.
“Because it's been the highest returning asset class for Teachers', we've been encouraged by the board to really invest [in] as many deals as we can find that we think are good and meet our expectations,” Uzumeri says.
And in 2007, invest it did. Aside from the commitments
TPC made to various private equity funds, its direct investment highlights included the $1.7 billion acquisition of General Nutrition Centers, a global nutrition and wellness products retailer, in partnership with Ares Management, as well as the NZ$2.2 billion ($1.8 billion) purchase of New Zealand Yellow Pages in partnership with CCMP Asia.
And then, of course, there is the largest-ever proposed LBO to date: the $52 billion buyout of telecom giant BCE, a club deal with Madison Dearborn Capital Partners, Providence Equity Partners and Merrill Lynch Global Private Equity. (Uzumeri was unable to discuss the transaction, due to pending legal and regulatory approvals.)
TPC's role as lead sponsor in the record-breaking BCE buyout is one of several reasons why readers voted the pension Canadian Private Equity Firm of the Year and LP of The Year in
Recognition in both categories is gratifying, Uzumeri says. “It's taken a long time to really shift that mind set” in terms of being viewed as more than a typical LP. “We actually do this directly and lead transactions and, on some days, we look very much like a KKR or a Blackstone.”
TPC doesn't decide upfront how much to allocate to direct deals versus fund commitments but manages on an overall risk basis, looking for the best opportunities. It was difficult to do in the past two years, when debt financing was so readily available and prices were being bid up, Uzumeri says.
“It was really hard because we came second in a lot of auctions and we were in some ways kicking ourselves, [thinking] maybe we should have extended ourselves [more]. But it's good we weren't too aggressive in some of those situations because we're sitting, frankly, with a lot of dry powder and being shown a world of opportunities.”
“World of opportunities” is not simply a throwaway catchphrase for TPC – it is, quite literally, investing all over the map. Last year alone, among its activities was the launch of a Turkey-focussed fund with Actera Partners; the opening of a London office; and its first UK deal with the purchase of a majority stake in Birmingham International Airport.
TPC also acquired two Chilean water companies. On being asked why the interest in Chilean water, Uzumeri quips that “it tastes good.” After a quick laugh, he adds: “We do scour the world for the best opportunities.”
While Uzumeri was speaking with
“It's a long way to go for a day, but you know what? That's the thing: in some ways we really sacrifice ourselves to find the best investments around the world,” Uzumeri says. “So wherever they are, we say ‘Get on a plane and go.”
What that ultimately means, Uzumeri says, is once investment activity reaches a certain level, it's necessary to open an office, as it has in London, or partner with domestic groups to ensure there are people on the ground to service existing investments and scout new ones.
“We've always invested first and got a critical mass through investing and then ultimately expanded,” he explains. “This last year we opened our first [foreign] office, which was in London, and that was after we had several billion dollars of investments and board responsibilities and we found that literally we were flying over to Europe every week.”
That's not to say TPC will always open an office in its targeted geographies.
“In Turkey, as an example, we thought that there were opportunities there and had been targeting the market for some time, but really couldn't figure out the right way to do it,” Uzumeri recalls. “There were a couple of individuals that I had a relationship with, that I knew were sort of the key, premier individuals in that market.”
TPC and the Canada Pension Plan Investment Board each decided to invest €75 million in Actera Partners, a new Turkish fund run by those individuals. The fund eventually exceeded its target by 30 percent, garnering commitments of €323 million.
That same partnership model has been applied in several instances, Uzumeri notes.
“In Europe, we really liked the mezzanine debt space and there was nothing there that met our return [expectations], both from a team point of view as well as an economic deal that made sense, by investing in traditional funds,” he says. “We partnered in that case with Robin Doumar and created Park Square Capital.”
The following year, the same strategy was applied to get exposure to North Asia investments with MBK Partners, which raised a $1.6 billion fund, and more recently with FountainVest, a China-focused firm formed by former Temasek executives and also backed by the CPPIB.
While TPC has been considering opening an Asia office for some time, and has also been evaluating potential partners in India, Uzumeri says his firm can't and won't target every region in the world.
“This is human capital intensive, so you have to really focus on a few areas,” he says. “That's always what we've done at Teachers'; we've really taken large outsized bets as opposed to diversifying. [We target a] smaller number of regions, managers” than do some other institutional investors.
Though TPC has been investing in Europe since 1992 and Asia since 1994, when Uzumeri joined the pension in 2003 from CVC Capital Partners in London, “we really started to take a fresh look at what we were doing in the emerging markets and prioritised some markets and regions, like Eastern Europe, which included Turkey, and North Asia [Korea, China and Japan] and a number of other markets, South Africa being one”.
The recently announced FountainVest partnership is the culmination of a five-year process, he says.
Last fall, Uzumeri, formerly head of TPC's international private equity investments, was appointed to head up TPC. He took the reigns from Jim Leech, who became Teachers' chief executive when 17-year veteran Lamoureux retired in December.
One of the things Uzumeri did subsequently was reshuffle the investment team according to sector expertise.
“It's really a natural evolution of our private equity business,” he says. “If you look at firms a number of years ago, they were more generalist. Then, as they did more deals and got more experience, they started to funnel people into various sector teams to leverage off the knowledge and experience they'd gained from doing private equity transactions. We've just done that with the same idea: it helps you with origination, it helps you with managing your portfolio companies, it helps in connecting portfolio companies, and helps you in your exit.”
TPC carves itself up into teams focussed on consumer businesses; industrial and business services; telecom, media and technology; financial services; venture capital; and private equity fund commitments.
“In addition to having that sector focus and expertise, we've also created a team that's really focused on value creating and driving that value creation process institutionally across our portfolio companies,” Uzumeri says.
He adds: “Today you cannot really get a steal in terms of a purchase, everyone's buying with full value,” Uzumeri explains. “So we've realigned our business to really take advantage and focus on generating that value, post-acquisition.”
CHANGING WITH THE TIMES
Market volatility is resulting in both a wave of deal flow for TPC as well as a slightly different approach to doing deals.
“You can imagine in markets like today, where there's a massive credit dislocation, there are opportunities being shown to us continuously about being a provider of that liquidity,” Uzumeri affirms.
But while there are many good companies that were simply over-leveraged and now find themselves unable to refinance, TPC doesn't intend to “deploy billions and billions just because the market is in a depression or in the state that it is”.
“There's going to be a number of opportunities that come up and we're being patient and looking for the right ones,” Uzumeri says.
He also notes that TPC has slightly changed its approach in light of tougher financing markets for new deals.
“What we're doing differently is definitely looking at companies and putting less leverage on them, but in some cases what we're able to do – because of how we're structured and how we're organised – is we're able to buy the entire company, both debt and equity, so we can provide our own debt finance, which most private equity firms really cannot do,” he says.
In terms of TPC's existing portfolio companies weathering the liquidity crisis, Uzumeri says they are fortunate in either not having been over-leveraged, or are not due for refinancing in the next 24 months.
ANALYSING MARKET TRENDS
While some pensions, notably The California Public Employees' Retirement System, have snapped up stakes in the management companies of private equity firms, it's a development Uzumeri has mixed feelings about.
Having been offered stakes in the past, Teachers' has always passed on the rationale that it may throw alignment of interest off-kilter and doesn't necessarily improve the way in which a manager invests.
“ That was our view upfront,” he notes. “That being said, in hindsight, I would have loved to – when we first started investing – say ‘Oh, yeah here's our commitment, by the way, we'll take a piece of that management company.’ So hindsight is 20:20, but looking forward, I think more and more funds are going to do it.”
That doesn't mean TPC will participate in the trend, nor take an official position against it.
“It is what it is and we're not telling people not to do it,” Uzumeri adds. “But at some point, if enough of the economics are in the hands of third parties, then you lose alignment, which is sort of our key focus. Does it distract the management team and focus them on creating a larger business and increasing the fee stream, which they may already be focused on but even more so, and less on just creating great investment returns? That's our big concern.”
A related issue is the management IPO trend, another way in which GPs are locking in franchise values and monetising their firms.
“To their credit, a lot of them are keeping the money in the firm or reinvesting in their funds, so it's really solidifying the base,” Uzumeri reflects, noting that perhaps in coming years private equity firms will undergo a transition to public companies in much the same way global investment banks did.
“I think all the large funds will eventually have some piece of their management company sold to a third party or will go public,” he says, noting that TPC will simply keep an eye on developments in the meantime.
Despite changes in leadership, structure and market conditions, Uzumeri says TPC will be conducting business as usual, focused on long-term returns and growing at a careful pace.
“We're going to continue to focus on finding those good companies out there and turn them into great companies, wherever they may be,” he reflects. A glance in the overhead mirror would no doubt see the Cadillac trailing far behind.