LP: Value-add trumps fees

When selecting GPs, Jane Rowe of the Ontario Teachers Pension Plan says operational capabilities takes greater importance over management fees.

Ontario Teachers’ Pension Plan sees meaningful operational work as an essential quality of a fund manager, according to Jane Rowe, senior vice president of Ontario Teachers Pension Plan.

“Value creation is absolutely paramount when we think about private equity funds and their future success,” Rowe said. “The way to make money in private equity today no longer rests on financial engineering or IPO markets.”

Rowe is on a visit to Hong Kong and yesterday she formally opened OTPP’s Hong Kong office, which will cover investment activity across Asia. In the next six months, the pension plan aims to have an Asia staff of eight.

Speaking about the organization’s criteria for assessing fund managers, Rowe said: “That for GPs to be in our sweet spot, we have to feel comfortable with the governance they have in place and whether they will be able to create co-investment opportunities for us. They should have strong investment backgrounds, records of success and a team chemistry that works well for the team and with us.”

Investment decisions tend not to be based on management fees, she said.

Value creation is absolutely paramount when we think about private equity funds and their future success

“The criteria for management fees is that there’s a recovery before there’s participation in carry. Other than that, a strong track record and the investment thesis is more important. We see ranges from 1.5 – 2 percent. If the funds have become absolutely massive funds, sometimes we think not 2 percent but 1.25 percent, so [the GP] is focused on creating profit and not living off management fees.”

OTPP also takes comfort if local pockets of capital are also backing a particular fund. “That would help us know that on that advisory board are people with greater local knowledge than we would have.”

Rowe said OTPP receives “hundreds, maybe thousands” of investment pitches in a given year. Last year, globally, it invested in only two new private equity funds.

However, the pension fund tends to re-up in its fund managers, she said. It works with 30 fund managers worldwide and last year it re-upped in about a dozen of those funds.

“If somebody makes it into our kitchen, that’s good for them,” Rowe said.