The private equity arm of the $87bn Ontario Teachers’ Pension Plan opened its first European office in 2007. The London-based team recently made its first direct control investment in the UK with Acorn Care and Education, purchased for about $245 million from Phoenix Equity Partners, a GP in whose funds OTPP invests. PEI talks with Ben Hewetson, the head of Teachers’ London office, about the group’s plans for Europe and the complexities surrounding the Acorn deal.
Why did OTPP decide to extend its direct investment strategy across the Atlantic?
We had been investing in funds in Europe since 1992 and making direct co-investments since 1993. But in the years leading up to 2007 those direct investments started to become more substantial. For example, Almatis was a German chemical business that we invested in 50-50 with Rhône Capital in 2004 and exited very successfully in 2007. With our direct business becoming sufficiently substantial, we felt it was an appropriate time to replicate in Europe the control investing model that had been very successful in North America for many years. For that, you need a local office, local people, local relationships, and local knowledge.
We’re very similar to many private equity houses in lots of respects, but we are not operators. We do not have a model we’ve got with operating partners on our payroll who go into the business changing the day-to-day operations. Instead, what we do is help to facilitate the professionalisation of the business. We try to instil really rigorous strategic and value creation plans, working with management teams to set very clear goals. Our involvement is therefore very much at the strategic board level. We’re not entirely passive. The number of private equity players who are entirely passive is dwindling by the day. I think people are seeing that that’s not the model that’s going to work.
Your first direct control deal was a portfolio company of a fund you’re invested in, managed by Phoenix Equity Partners. Did that relationship change your approach to the valuation?
We approached the valuation as we would with any business. We look at what we think the merits and risks of the business and we look at what an appropriate valuation would be, and what the right valuation for us would be. The fact that it was owned by Phoenix made no difference at all in how we approached the deal. If anything it made it more complicated, largely from their point of view, because they’re the ones who would be looked upon for any conflict of interest issues. The way that these situations are dealt with is to be playing with a very straight bat, which is exactly what happened.
Phoenix hired Rothschild to conduct an auction, and we heard rumours that 15 to 20 parties were involved. We won that auction fair and square. We put the best price on the table, our offer was the most deliverable, and we did the most work.
What about Acorn appealed to you?
It operates in two interesting spaces: special needs schools and fostering, both of which are areas where we see a huge amount of growth. Not only is there strong underlying organic growth, both divisions of the company operate both sides in very fragmented markets, so we see this as a great opportunity to consolidate.
We try to find opportunities where our differences and our flexibility are more relevant and valued. We are able to invest over a longer term and we are able to invest multiples of our initial equity cheque in a given situation. Most private equity houses are restricted by their fund documents on both those counts. That appealed hugely to the management team at Acorn, who’ve got big ambitions for how they’d like to grow this business. If you want to grow a business by buying other businesses, you need capital. And you probably need a bit of patience as well, because acquisitions just don’t come along whenever you want them to. That suits our capital perfectly.