Ontario Teachers’ 2007 returns slump; alternatives save day

The pension’s lowest annual return for five years was boosted by alternatives, despite private equity returns falling by almost two-thirds. Teachers’ also faces a $587 million break-up fee if the BCE transaction fails to close.

The Ontario Teachers’ Pension Plan reaped a 9.8 percent return from its private equity investments last year, down from a 26.9 percent return in 2006. However its private equity arm, Teachers’ Private Capital (TPC), added roughly C$840 million ($819 million, €522 million) in value to the pension’s assets, up from the C$350 million it added in 2006.

The C$108.5 billion public pension attributed the rising Canadian dollar’s adverse impact on foreign investments as well as credit market dislocation to the lower-than-usual returns – the cumulative portfolio’s 4.5 percent return, though it beat its benchmark, was its lowest in five years.

TPC, which invests roughly 8 percent of Teachers’ total portfolio both directly and via fund commitments and co-investments, invested a total of C$9 billion last year, representing a C$1.7 billion increase from 2006. Its 9.8 percent annual return beat its -0.9 percent benchmark.

Major private equity transactions last year in which TPC was involved included a $1.7 billion exit from luggage manufacturer Samsonite, representing a five-fold return; the pending $52 billion buyout of Canadian telecom BCE; the $1.7 billion acquisition of global retail chain General Nutrition Centers; and the NZ$2.2 billion ($1.7 billion, €1 billion) purchase of New Zealand Yellow Pages.

Erol Uzumeri

Erol Uzumeri, the head of TPC, recently told sister magazine Private Equity International that because private equity has been Teachers’ highest returning asset class, “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”.

Jim Leech, Teachers’ chief executive, said of the 2007 results: “Diversification has always been a hallmark of our investment program, and our real estate, private equity and infrastructure assets led the way with our tactical asset allocation and absolute return strategies in producing a 4.5 percent total fund return, decisively outperforming the 2.3 percent composite benchmark.”

Real estate was the pension’s highest performing asset class, returning 14.7 percent. Managed by wholly owned subsidiary Cadillac Fairview, Teachers’ real estate investments increased to C$16.4 billion from C$14.5 billion in 2006. Its real estate portfolio was highly concentrated in Canadian retail, which comprised 58 percent of its holdings. The annual report called real estate a “good fit for the pension plan because it provides strong, predictable income and a good hedge against inflation”.

Infrastructure and timberland investments are also typically considered a hedge against inflation; Teachers’ grew those assets to C$8.8 billion in 2007, up from C$6.8 billion. Their annual return last year was 0.8 percent.

The annual report also revealed that TPC is deploying less capital domestically; last year, 22 percent of its private equity investments were in Canadian companies, compared to 32 percent in 2006.

One of its 2007 Canadian deals is the largest-ever leveraged buyout proposed to date. Still pending, the $52 billion BCE buyout is being led by TPC along with Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity. Though the sponsors said the deal should complete by June, Teachers’ annual report revealed that the pension would be responsible for $587 million of the $1 billion breakup fee should the deal fail.

TPC was recently named Best Canadian Private Equity Firm of the Year in PEO’s and Private Equity International’s 2007 Global Private Equity Awards. Teachers’ was also named Limited Partner of the Year by the publications’ editors. An in-depth conversation with Uzumeri is featured in this month's issue of Private Equity International.