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00:00Thank you for having me.
00:01We are the closing act here.
00:03So thanks to everybody for staying all day.
00:07And let's jump right into it.
00:10You manage some very important pensions,
00:13the pensions of some of my family members who are Ontario teachers.
00:20You've talked about putting more emphasis within the organization
00:24of making sure the investing team is focused on, like, what's our edge
00:28if you're taking active risk, you know,
00:31there needs to be an excess return and so on.
00:33And I'd like you to start by delving into that investment process thing.
00:37You know, what kinds of decisions have you made in Ontario teachers
00:41to focus the team on where's our edge?
00:45Right.
00:47Yeah, I mean, edge is one of these terms people use a lot.
00:50And when you try to define it, it can get a little bit looser in practice.
00:55I think it's important to understand that teachers has a portfolio
01:00that is built out of a foundation of assets,
01:03what we call an all-weather portfolio construction
01:07that is really based on being able to manage through different potential scenarios
01:14where growth and inflation can perform differently than expected by markets.
01:18So that's our foundation of returns.
01:21On top of that, we take active risk in areas where we think we have an edge,
01:25and that's to the extent that you think you can generate excess returns.
01:28So where do we focus?
01:30Traditionally, teachers has been very strong in private asset investing.
01:35We were one of the first pension plans to be investing directly
01:39in things like private equity, infrastructure, timber assets.
01:43There were a lot of innovations in the teachers' portfolio,
01:45and so we had some first mover advantage there.
01:48I'd say some of that translates into edge today
01:52in the sense that we have the capabilities to invest in the asset classes.
01:56We have a long history of being there,
01:57and so we're somebody who tends to get calls by people
02:00who would like to partner on various assets,
02:02so it puts us in the flow there.
02:05I think having the pool of assets that we have
02:09and the history of investing also means that we've partnered
02:12with other organizations over the years.
02:13We invest through funds as well as directly,
02:17and so we have access to a lot of smart funds, smart partners for assets.
02:22And so, again, that helps us both be able to see what interesting sectors,
02:27geographies they're focused on, what their pipelines look like,
02:29what their fund age looks like,
02:31what kind of assets are they interested in buying or selling,
02:34which can help build flow for us.
02:37So we think about those things in terms of the business.
02:39Now, I think some of these markets have become more challenging for,
02:47I'd say primarily just because of the reset we've seen in real rates
02:51over the last couple of years, and that is still pricing through markets.
02:55And so we have to be sort of looking carefully in the mirror
02:58around what has changed in these markets
03:00and how does that impact our edge or not.
03:02So if I can give one example would be our real estate,
03:08we had real estate managed externally by a Canadian owner
03:12and operator of assets, Cadillac Fairview.
03:15And as we were expanding our real estate portfolio into globally,
03:21I guess, so into other regions,
03:23and also it was predominantly office and retail focused,
03:26and we wanted to get more sector breadth there.
03:29So we asked Cadillac Fairview to do that for us.
03:32Now, that was not their edge.
03:34Their edge was developing and operating properties
03:36in retail and office in Canada.
03:38And so we made the decision beginning of last year
03:41to bring real estate in-house
03:43because we want more of that investment focus,
03:46both you should be a buyer and a seller at any price on any asset, right?
03:49Not really attached to the assets you hold,
03:53and we felt that was best managed within an investment
03:55total portfolio construct within Ontario Teachers,
03:58and so brought real estate in-house for that reason.
04:01Let's talk a bit about the environment and private equity
04:04because, of course, we had the shock of rates a few years ago.
04:07Three years ago at this event, we were talking all about interest rates.
04:10Yeah.
04:11Then, obviously, that pressure has lessened,
04:15but other pressures have come in.
04:17So give us your sort of taking stock of what the opportunity set looks like
04:22for you as a large investor in private equity.
04:26Yeah.
04:27I think interest rates are certainly part of the picture there.
04:31I think private equity has been a very successful investment strategy
04:36for many years for lots of different investors,
04:39for us as well, both directly and through funds.
04:41What we've seen is that with the reset in interest rates
04:46certainly impacted the ability to leverage the assets you own
04:50and generate higher returns for higher risk,
04:52but generate higher returns out of those assets.
04:55I think we also saw a real re-rating of multiples
04:58in privates versus public markets
05:00where private multiples had started to become quite highly valued.
05:06There were some pretty high multiples
05:08through the post-COVID low-rate flush into private assets.
05:14And so when you're modelling private equity,
05:17I think you have to understand what the drivers of your return are.
05:20And to the extent that interest rates or leverage
05:22and multiple expansion was part of that calculus
05:26for your expected returns on assets,
05:27you have to recognise that those just aren't providing the same tailwind
05:30that they might have in the past.
05:31With that, I think the question is,
05:34how do you generate returns out of private assets?
05:37And for us, that means refocusing on actually
05:40the operating company level results.
05:43So how do you drive revenues, drive efficiencies in companies?
05:48And so we formed a group within Ontario Teachers.
05:51We took some asset management professionals
05:54from across all the different asset classes
05:56and brought them together into a team called Portfolio Solutions.
05:59And so that team now sits with our deal team
06:02from the moment they're looking at an asset
06:04and working on the valuation, both to buy that asset,
06:07but how are you going to drive value over the life of that asset and sell it?
06:11And they sit with the deal teams and go through,
06:13these are the five levers of value creation we're going to focus on.
06:16We think we can take this measure from X to Y.
06:19If we do that, it will create X amount of revenue
06:21or reduce costs by X.
06:23And that will be the driver of the returns.
06:25And so there's a much more of a, I'd say,
06:27getting back to old school private equity
06:29where you're actually improving operating performance
06:31versus being maybe as focused on financial engineering and private equity.
06:37In terms of fund investing,
06:39some of our reporters have heard that some non-U.S. LPs
06:43are starting to price in higher risk when looking at,
06:47when investing in U.S. domiciled funds.
06:49Is that the case, whether they're private equity or hedge funds
06:53or whatever it may be, is that the case for Ontario teachers?
06:56No, not, I wouldn't say there's like a pricing for U.S.
07:01Every asset is assessed on the risks of that particular asset.
07:05I think when we recognize that there's more uncertainty
07:08or a wider range of potential outcomes over an asset that we hold,
07:11you're going to price that in as increased risk
07:13and ask for an increased return to that.
07:15But I'd say that's on an asset-by-asset basis.
07:17As opposed to looking at the U.S. as its own sort of unique case.
07:24Is it, let's talk about public markets for a moment.
07:28Is it possible for a fund of your size
07:31to generate excess returns in public equities right now in this environment?
07:37And if that's hard, what do you do about it?
07:41I think it's hard for, to be clear,
07:44it's hard for any fund to outperform, let's say, S&P 500 public market returns,
07:51which have really been incredibly strong over the last couple of years.
07:55And that's true for public or private assets.
07:58It's a hard benchmark to outperform.
08:00We still have conviction on the private side that over a cycle,
08:03we should be able to generate excess returns over public markets.
08:06Our experience, and this goes back to the earlier question around
08:11how do we define our edge,
08:12know where we can actually build conviction and add value to the pension.
08:18When we look at public markets,
08:20it's something that we've approached from multiple angles over the years.
08:24And we have not found a real sustainable angle
08:28in that kind of fundamental public equity investing
08:31where you have a sort of a better grasp of the valuation of a company
08:37than where the market happens to be settling in terms of a clearing price.
08:42And that, I think, is just public markets are, in the U.S., quite efficient, right?
08:47You've got a little bit of this tension between,
08:50if you want inefficiency in markets, you have to go to less liquid markets.
08:54So by definition, there's less that you can scale there, right?
08:57And so there's going to be some tension between where you can find opportunities.
09:02I think some investors do better in that space.
09:04It's something that we haven't had a lot of success in.
09:07We still have success internally on a quantitative basis,
09:12investing equity long, short programs.
09:14And I'd say also we see partners, like through our external managers,
09:17hedge fund partners, who are very good at exploiting,
09:20I'd say more deep expertise in inefficiencies
09:26between very distinct pairs of stocks, et cetera,
09:29where you can go both very deep but also trade at a much more rapid pace
09:33than what would suit us in terms of our internal investment strategies.
09:37And so we still have that risk.
09:39We've just tried to figure out where is it best
09:41that we can do that investing directly versus give it to an external manager.
09:44Right.
09:45So speaking of that internal, external, let's talk about private credit.
09:49How do you guys handle it?
09:51Where are you focused and what's the stuff that is, you know,
09:56in the we're not interested category?
09:59So in private credit, it's something that we had had a presence in that market,
10:06I'd say, for many years, just quite small.
10:10It was something that in 2020-ish, like I can remember,
10:15it's that, you know, COVID from like when you were at home for long periods
10:18and having all the video calls.
10:20It was all video calls when we were talking about starting a private credit mandate.
10:24We initially got exposure through funds because, again,
10:27lean on your smart friends who have the origination networks.
10:30They have the ability to work out distress names, et cetera.
10:34What, you know, where were we going to build those capabilities
10:37besides sitting beside a partner and learning with?
10:39So we started with fund allocations.
10:41I'd say over the last couple of years, private credit is, as an asset class,
10:46it has improved in the all-in yield side, but the spreads have been fairly tight,
10:50and we think of it as a spread product more than an all-in yield product.
10:53So as that came in, and you're sort of still paying external managers
10:59the same kind of returns over hurdle rates,
11:03that hurdle rate is now being assisted a lot by just base rates
11:05rather than, you know, actual outperformance.
11:07And so as that kind of shift between the value for dollar, I guess,
11:11to external managers started to shift,
11:13we started bringing in more and more of that capital
11:15and hired up a team to manage that.
11:18In terms of where we go or don't go,
11:21our credit team manages across the spectrum of public to private,
11:25so the opportunity set is very broad.
11:28I like that because it means we're always calibrating those two markets,
11:32one to the other, and making those choices about which market
11:34is better priced than the other.
11:37I think issuers seem to be increasingly going to both markets simultaneously
11:41or certainly comparing between,
11:43and so we feel it positions us well to be competitive in that market.
11:46The only area where I don't, we don't tend to play
11:51is really in the investment grade space,
11:53which again I think turns into more of a duration rate product
11:56rather than a spread product.
11:58So we don't tend to do a lot in that space
11:59because we don't see it as being a good source of excess returns
12:03without sort of excess leverage to get to the return hurdle you need.
12:08All right, I've got, in the time we got left,
12:10two AI-related questions.
12:12Okay.
12:13Yes.
12:14The first is about, really, it's about the market environment,
12:18and I'll avoid using the word bubble,
12:20but is the space overheated in public markets?
12:24Is it overheated?
12:25I have a colleague who says, like,
12:29the overheated stocks can keep on getting overheated,
12:32whether you call them that or not, it doesn't really matter.
12:35I mean, I'd say it's a point certainly of concern.
12:38Valuations are pretty high.
12:40We do take stock against,
12:43these are companies that are generating cash flow.
12:46So, you know, people make the distinction
12:47to the kind of intranet bubble in 2000
12:50where we're not at those kinds of PEs by any measure
12:53because these are real companies making real earnings.
12:56It's a big CapEx spend.
12:57It's something that we as a fund have aligned with
13:01in terms of, you know, the data centre space
13:04where we've been invested in the development
13:07and operation of data centres,
13:09and also certainly in the energy space
13:12where we have a fair amount of investment
13:15in the generation and transmission of electricity,
13:18which is one of the big needs for the AI piece.
13:21So I'd say we're trying to be thoughtful
13:23about where we play this space
13:27and where we think the risk-reward is better
13:30and where it sets up better with our skills, frankly.
13:33All right, and so my second AI question
13:36is about how you use it
13:39and how the people on your investment team
13:40use it within your investment process today
13:43and where might you be going with it?
13:45Yeah, I mean, I use, we use AI internally
13:51I think it's as good as the data that you can feed it.
13:55Our data has not been, on the private side,
13:58it's not been something that we have ever built
14:01or with a view to let's make this accessible to AI.
14:05And so we're playing a bit of catch up there
14:06and trying to get our data into the shape.
14:08We want it to be able to point it
14:10to 35 years of investing, right?
14:13There's a lot of pattern recognition value
14:17that could be generated out of that.
14:18So we're excited about that.
14:19I use it now, certainly when I'm scanning through emails,
14:25when I'm prepping for my week,
14:26when I think about the concerns I have
14:31that I'd like to scan through,
14:32what underwriting committees are looking at
14:34and get a sense of where the whole fund is going.
14:38So I use it quite heavily.
14:39I think our teams are using it a lot
14:41in some of the very early stage
14:43of looking at, you know, market scans, et cetera,
14:47where they might have gone to consultants outside.
14:49They can do some of that internally now.
14:51And then obviously the big concern for us
14:54is we're a big holder of private assets
14:55and making sure that we're looking at that portfolio
14:58of private asset companies
14:59and considering who's going to be disrupted here
15:01and who has an opportunity for better returns
15:03and trying to get ahead of the disruption
15:05and align our companies with the return opportunity.
15:09Have you made any specific moves yet
15:11on the basis of that concern that you hold?
15:14Yes.
15:14I'll say yes and leave it at that.
15:16Do you care to share it?
15:18No, no details to share.
15:20All right.
15:20All right.
15:21Well, we'll read your next annual report with interest.
15:23And thank you so much for taking the time today.
15:26Thank you very much.
15:27Thanks.
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