LP PRofile: Diverse Approach Produces Big Returns for Teachers –

“By all rights I should have had a career in the military,” says James Leech, senior vice president of Teachers’ Private Capital (“Teachers'”), the private equity arm of the Ontario Teachers’ Pension Plan in Toronto, Canada. The men of his family have shared career leadership positions in Canada’s armed forces; most recently his father and uncle were generals in the Canadian Army, in which Leech himself served from 1968 to 1970 as an officer assigned to European service. But that experience and exposure to the larger world insured that a different person returned home to Toronto.

Having received his first degree from the Royal Military College of Canada (Canada’s West Point), Leech decided to study for an MBA at Queens College in Kingston, Ontario from which he graduated in 1973. After that the military ceased to be a part of Leech’s life. Instead, he started a 30-year career in business, serving as President of Canadian merchant bank Unicorp and CEO of Union Energy where he was president before heading up two technology startups.

Leech could have retired at an early age, but he gave in to the recruitment effort of Teachers’ in 2001. Teachers’ is one of the largest pension asset management institutions in the world, with more than 250,000 active members-primary and secondary school teachers in Ontario-and $80 billion Canadian dollars in assets. Teachers’ was formed as a result of the joint efforts of the Ontario Teachers Federation (made up of four different union organizations within the province) and the Ontario Provincial Government. Ontario’s teachers have had pensions administered by the Government since 1917, but in 1990 it had to recognize the fact that its pension assets, up until then invested in unmarketable Ontario bonds, would not be able to support its members’ needs in their retirement.

So, in 1990, Teachers’ was formed to address the growing pension needs of the plan’s members. It was handed $17 billion worth of government bonds and told to make the money grow. “From the first day we existed, the amount of annual benefits we paid out exceeded our annual revenues,” says Leech. “And it’s still true today. Last year we received $1.5 billion in new savings from our members and paid out $3 billion in benefits.” It’s the kind of math that is frightening pension plans around the world, from China to the United States. Since 1990 “We’ve turned that $17 billion into $80 billion in assets,” growing its members’ assets an average of 11% per year, Leech says. As impressive as the 11% growth rate is, Teachers’ has had even more success with its private equity investments, posting 27% growth over the same 15-year period, according to Leech.

It’s a track record that most mutual funds-which benefit from independent management and the best investment managers that money can buy-can only dream of. And yet it hasn’t been good enough. Teachers’ is still running a deficit, a “shortfall” in pension lingo. Its 2003 annual report says that unless the fund makes improvements its government charter will require a “reconciliation” in the next year.

From the outside, Teachers’ looks similar to CalPERS or other large public pension funds. But that’s where the similarities end. Its definition of alternative investments is especially broad and includes real estate, hedge funds, commodities, timberland, infrastructure, private equity (buyouts and direct investments) and venture capital. Venture Capital is in fact, the smallest portion of the fund’s portfolio (“only a bit over $300 million,” says Leech, “but then we only really started in VC in 2001.”) Overall, about 10% of Teachers’ $80 billion in assets is invested in alternative investments.

For Teachers’, private equity “means buyouts, but includes direct investing,” Leech says. And by direct investing, Leech means that he and his staff don’t just place funds in buyout firms; the professionals at Teachers actually invest in deals themselves as opposed to relying solely upon buyout firm managers to make investments for them. The buyout firms it has invested in include BC European Capital, Osprey Media Holdings, Providence Equity Partners and Silverlake. Among the venture firms where OTPP is an LP are Abingworth, Accel Partners, DCM-Doll Capital Management and New Enterprise Associates.

“You’re right not to think of us as just another institutional LP that operates as a fund of funds, [with a focus] on selecting the right managers,” Leech says. Instead, Teachers’ is more of an active manager and investor that seeks growth of its assets more aggressively than most institutions.

That can be dangerous territory. Some institutional LPs have made similar attempts to make the leap from manager selection to active investing and have failed horribly. Another Canadian LP “tried to make investments and manage them and it blew up. They had to fold the entire effort and go back to investing in funds,” says a U.S. Managing Director who is familiar with Teachers’. “Sometimes it works, sometimes it doesn’t, but Teachers’ is trying hard to get it right. And they’ve succeeded in their own geography. They’re the 800-pound gorilla in their own back yard and have really successful deals.” The source attributes a big part of Teachers’ success to the fact that it pays its staff “like private firms so that they retain good people over time.”

Unlike some institutional investors, Teachers’ isn’t afraid to go off the beaten path in search of big returns. It has reached out to investment sectors like professional sports franchises, like the Maple Leaf Sports & Entertainment Group, which owns a professional hockey team and a national basketball association team.

Just because it’s based in Canada, Teachers’ doesn’t feel beholden to invest in its home country. At a meeting of the Canadian Venture Capital Association last year, some local VCs grumbled that Teachers’ wasn’t doing enough with its capital to support local firms. Leech told the audience that Teachers’ had no intent of bowing to such pressure because its only mandate is to its pension holders-to insure that the monthly checks continue to arrive on time. Setting aside the Canadian penchant for gentle remonstration, Leech asked his audience of VCs why he should put more money into local firms “when returns in Canadian venture capital are negative 5.8% and buyouts are only 6.1%. Why would institutions choose to invest with Canadian firms instead of U.S. venture capital funds or buyout firms [where returns are superior]?”

Moreover, Leech says that his group and other pension managers in the province had to fend off an attempt to gerrymander their investment mandates by Canada’s federal government last year when legislation was drafted that would have placed limitations on how and where the Teachers’ makes its investments. It would have capped pension plans investments, for example, in income trusts, an attempt that Leech characterized as potentially “disastrous.”

Teachers’ hasn’t blanched at taking a leadership role when it disagrees with policy, like the “Canadian government’s ill conceived tax proposal to limit our ability to invest in business income trusts.” It helped to “mobilize the industry to convince the government of the folly of their ways,” Leech says. And while Teachers’ takes a “low key” approach, he says that it is a leader in corporate governance. For example, it helped to launch an educational institute for corporate governance, open to directors of public, private and not-for-profit companies and which provides training in best practices.

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