How private equity is adapting to create value
Dale Burgess, Executive Managing Director, Equities, discusses why value creation, focusing on where you have an edge, and well-timed exits are defining the next era of private equity.
At a glance
- Private equity remains a core driver of long‑term, risk‑adjusted returns in the portfolio, even as the sources of those returns are shifting.
- Returns are increasingly driven by operational improvement.
- Sector focus has narrowed from six to three: financials, technology and services.
- Ontario Teachers' has been an active private equity investor for more than 30 years, delivering a 16% return since it began investing in the asset class.
Long-term investors are having to adapt as the private equity landscape undergoes significant shifts. Dale Burgess, Executive Managing Director, Equities, at Ontario Teachers’, and David Nowak, President of Brookfield’s Private Equity Group, recently joined Christopher Witkowsky on Spotlight: A PEI Podcast to discuss how private equity investors are positioning themselves for long-term success. Watch the full conversation and read highlights from the discussion below.
Dale Burgess shares Ontario Teachers’ perspective on private equity in a changing market on his recent PEI Group podcast conversation with David Nowak of Brookfield, hosted by Chris Witosky of Private Equity News.
What is your background and how does Ontario Teachers' approach private equity?
Dale Burgess (DB): I've been with Teachers’ for close to 30 years. While I am relatively new to private equity, having joined the team last year, I am not new to private investing. I’ve been investing in private markets, in particular in infrastructure and natural resources, for many years.
We invest in private equity for one reason: to earn excess returns over what you could earn in the public markets. This is still the role we expect private equity to play in our portfolio.
What distinguishes the team at Ontario Teachers' is that we attract a different type of investment professional. It is the people and the mission of the organization that is the most unifying thing about working at Teachers’.
Private equity has got a role, but other asset classes have a role as well. It is a team effort at the end of the day from an institutional perspective. We are in the market representing teachers across a number of different private assets, given the nature of our liabilities. At the end of the day, we are targeting a 7% return as a fund, and that guides everything we do.
"We've been in private equity as Teachers' for 30 years. We will hopefully be in it for another 30 years. We're open for business."
How has the market environment changed for private equity?
DB: We've had a long history in the asset class. We've had a 16% return since we started investing in private equity. But as I look forward, the golden age of the asset class with some of the tailwinds it previously enjoyed, are gone. What we are seeing now is people moderating their expectations in terms of the excess returns they can expect on a go-forward basis. The way those returns were generated in the past is not going to be the way they're generated in the future.
As we look forward, now one of the most important levers is the work done to improve the underlying business of a portfolio company. Closely tied to that is ensuring that you have the right team and capabilities across that team that can work closely with the company to drive growth and value.
How is Ontario Teachers' responding to that shift?
DB: At Ontario Teachers’, if I could describe our approach to private equity in one word, it would be focus. We are laser focused on delivering as much value as we can out of our existing portfolio. We are focused on exits. And we are spending time thinking about what we want our portfolio to look like by focusing on the sectors where we feel we have an edge.
The sectors where we believe our team has an advantage and where we can deliver excess returns are financial services, technology and services.
How are you approaching exits?
DB: We're spending a lot of time on exits right now and making sure that whenever we bring an asset to market, we are having a conversation across the entire team about how it would be perceived in the market.
You still hear a lot about exits in the market right now because the valuations haven't fully reset based off of what the market will bear. There is an opportunity cost to not selling an asset and having it sit in your portfolio. Right now, we're trying to find balance. Where we do look to sell, we want to recycle that capital towards opportunities where we would expect higher returns.
Do you see the private equity industry shrinking?
DB: I don't think it will shrink in terms of absolute dollars. I think there will be a consolidation of those that are more successful and naturally leading the race. I just see more of a consolidation and more of a survival of the fittest.
"There's no shortage of teachers that remind you who you are investing the money for."
