How has the evolving market backdrop influenced the way you source deals?
Nick Jansa: Although the market looks a bit different than it did a few years ago, it's important to remember that the market is cyclical and that investing is for the long term. Over the last few years, we saw people get caught up in the belief that private equity investing is like an intermediary financial services business, where it's all about the deals. Everybody was working so fast that they forgot about their portfolio companies. Now, the focus has shifted back again to those portfolio companies. In time, as the market comes back, that should equate to a better middle ground.
Ultimately, a successful long-term investment strategy is not just about high transaction volumes. When you're sourcing deals, it's the same private world, the same public world, and the same companies; things just shift in terms of where people see the best opportunities. Every five to 10 years there will be a phase when people talk about public to privates, but long-term investors are always looking at public, they're always talking to corporates, and they're always looking at the private sphere. The only difference today is that there are more companies in private hands, which means we should see a heightened level of transaction volumes in the next five to 10 years.
How should investment firms value businesses in the current climate?
NJ: In a rising interest rate environment, the base case for most investment firms should be to start with “multiple compression” and see if the investment case still works. That hasn’t necessarily been the case for many years, when people could rely more on good macro-economic tailwinds.
I think it's incumbent on the industry to make sure they're investing the right way – looking for growth building opportunities, but not relying on being able to buy low and sell high ('multiple expansion') as part of their basic investment thesis. If firms base their judgment on the right multiples, we should see some very interesting investments over the next couple of years.
Where is the focus within ESG currently and how could it evolve?
NJ: We should look at these as three separate areas. In general, governance is on a good path as most companies understand its value. It’s also moved quite a long way and continues to move in the right direction. For us, governance has been key and long-running within Ontario Teachers' for 30 years. Our stakeholders are the teachers and the government – they set a high bar when it comes to ethics. Our pension plan needs to provide sustainable long-term returns and best-in-class governance practices to ensure we provide lifetime pensions to our members.
When it comes to environment, much of the conversation today is about the data. The industry went from questioning the science 10 to 15 years ago to total acceptance today, and that was data driven. The next challenge is around creating the ecosystem for more detailed Scope 1, 2 and 3 emissions to allows more consistency for businesses to measure and address these. That's another five- or 10-year journey but it's accelerating at a fast pace.
The social aspect of ESG is probably the most topical, but it's also the most difficult, the most political and the one with the least data. For us, focusing on the positive impact we can have as a pension plan, while striving to make good risk-adjusted returns, is an important business driver. Social is where we as an industry will have to invest the most thought to accelerate this area. It's also somewhere we see younger generations having a much stronger viewpoint, more than any previous generation.
Is investing in talent a key focus for Ontario Teachers'?
NJ: Investing in talent is a permanent task. We believe it's important to build the next generation of talent because diversity of thought is important. Younger generations think differently and we can't just rely on existing views of what is going to happen in the next 10 or 20 years. We need expertise, but we also need different perspectives; an 18- to 25-year-old thinks very differently from the investors of the past.
How are you thinking about artificial intelligence at Ontario Teachers'?
NJ: Artificial intelligence is a huge theme – we think of it as part of a much broader disruption question. We created our own venture studio, Koru, to work exclusively with our portfolio companies to test and build new products and capabilities that help them thrive in the face of disruption. We also created a new asset class, Teachers' Venture Growth (TVG), to invest in late-stage companies building technology to help shape a better future. These are some of the ways, as a pension plan, we're looking to invest in this theme but also to better understand how the world we operate in will shift and how we could be disruptive ourselves.