OPTrust has greatly expanded its private equity program, deploying a strategy that gives the mid-sized pension fund access to opportunities usually available only to larger institutions.
OPTrust, which invests on behalf of OPSEU Pension Plan, the retirement system for about 90,000 Ontario public employees, this week reported a net return of 6 percent for 2016. Net assets grew to more than $19 billion from $18.4 billion in 2015.
Overall numbers were boosted by a strong performance in the PE portfolio. PE investments returned a net 20.6 percent last year, up from 14.4 percent in 2015.
These results cap a major five-year increase in OPTrust’s PE allocation. At the end of 2016, the portfolio held nearly $1.6 billion in assets, more than triple the amount in 2012. Private equity’s share of total assets rose in this period to 9 percent from 4 percent. OPTrust’s notional target is 15 percent.
OPTrust Managing Director Sandra Bosela, who heads the global PE group, told Buyouts that most of the growth owes to a strategic shift favouring direct deals and co-investments.
Prior to 2012, the main focus of OPTrust’s PE portfolio was funds and secondaries, with direct activity accounting for 20 percent of assets, Bosela noted. By 2016, the direct share was 48 percent.
Bosela, formerly a general partner with 15 years of experience, joined OPTrust Private Markets Group in 2012 to develop the PE strategy and ramp up direct investing. She says the result is an ability to “punch above our weight.”
“I’m pleased with the progress,” Bosela said. “Our strategy has been designed to carve out a niche that leverages our size and includes more direct, actively managed investments. It has opened doors for us and created access to deal flow that’s typically available only to our much larger peers.”
Deals plus funds
OPTrust is targeting a 50:50 balance between the portfolio’s direct and fund sides, Bosela said. That’s because many of the best opportunities for co-underwriting deals come from a core group of fund partners.
Opportunities are also sourced with “like-minded partners,” Bosela said. They include a range of market players, such as PE firms, strategic investors, financial players and business owners.
Drawing on these sources, OPTrust has increased both the pace and range of its mid-market buyouts and other PE transactions in North America, Europe and developed Asia.
Disclosed examples include OPTrust’s 2014 investments alongside Altas Partners in St. George’s University, a Grenada medical school, and alongside CDCM in Skybus, an Australian airport transit service.
Over 2014-2015 it also joined Imperial Capital Group in backing U.S. home-alarm monitor Ackerman Security Systems and Canadian dental network Dental Corp.
OPTrust’s experience may provide a model to some other small and mid-sized pension funds looking to expand their PE allocations.
John Groenewegen, a partner at law firm Osler, Hoskin & Harcourt, says OPTrust’s private equity program has “put them in a position they would not otherwise be in.”
Groenewegen, who advises pension-fund clients, says a central factor in OPTrust’s approach is in-house resources that include “professional deal-makers.”
“OPTrust has invested in the right funds, and an experienced team has ensured it can act quickly and make decisions quickly,” he said. “That’s key to being a good deal partner, to being invited back.”
Bosela agrees, noting that OPTrust’s ability to be “a value-adding partner, one that can execute shoulder-to-shoulder, even on complex transactions” is essential to its direct investing. “We’re not the big elephant in the room,” she says. “We must offer something other than our money.”
Not standing still
OPTrust aims to place more capital in the months ahead, Bosela said. She is mindful, however, of an “overheated” market environment, fuelled by high values and “heightened levels of dry powder.”
Market frothiness has reinforced a disciplined, selective focus to investments, Bosela said. OPTrust also will give more emphasis to private debt and long-term equities to help balance the portfolio and reduce volatility.
Bosela says OPTrust is not “standing still” with the PE program, but will instead continue to add to its capabilities. For example, it is exploring “proactive origination,” intended to accelerate independent sourcing of direct opportunities.
OPTrust PMG has a team of 18 located in offices in Toronto, London and Sydney, Australia. Overseeing nearly $4 billion in assets, it is co-led by Bosela and Gavin Ingram, a managing director and head of the global infrastructure group.
Photo of Sandra Bosela courtesy of OPTrust
Photo of John Groenewegen courtesy of Osler, Hoskin & Harcourt LLP