Ontario Teachers’ Pension Plan intends to dramatically increase its investments in private technology companies despite a sharp drop in valuations in recent months.
The pension plan – the third largest public investor in Canada – says it will add staff with a goal of making private tech investments 7 per cent to 10 per cent of the portfolio, up from 3 per cent, or $7.1-billion today.
At $241.6-billion in assets at the end of 2021, Teachers trails only the Canada Pension Plan Investment Board and Caisse de dépôt et placement du Québec in asset size, and is the largest single-employer public pension manager in Canada.
That growth goal could translate into billions more dollars in private tech, because Teachers aims to reach $300-billion in overall assets by 2030. If private tech is 8 per cent of a $300-billion portfolio, that would push Teachers’ holdings in the asset class toward $25-billion.
Greater investments in companies that have not yet gone public would be a shift for Teachers, which has historically placed a large proportion of its portfolio in publicly traded stocks and bonds.
“First and foremost, it’s about returns,” said Olivia Steedman, senior managing director of Teachers Innovation Program. “I think we can all agree that earlier-stage investing, while it comes with more risks, can offer higher returns.”
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Ms. Steedman’s department returned 40 per cent in 2021, even as publicly traded technology companies began a hiccup in November of last year. Since a peak in the fall, the prices for a number of prominent tech stocks in Canada and globally have fallen by 50 per cent or more. While the devaluation hasn’t spread widely to private equity markets, industry watchers expect that to happen later this year, which could result in writedowns.
Ms. Steedman said Teachers does not currently see a need to take widespread writedowns of the value of its holdings, even though it made a number of late-stage investments when valuations were at their peak. That includes a funding in June, 2021, of Waterloo-based ApplyBoard, a company whose online platform aims to improve the process international students use to apply for schools abroad. The US$230-million financing valued the company at more than US$3-billion.
“We’ve been watching this big correction in the [publicly traded tech companies] very closely ourselves, and at this point in time, we don’t expect any major writedowns in our book; we’re very pleased with the positioning,” she said. “Certainly as we go forward ... we are looking very, very carefully at forecasts and thinking through the ability to deliver on those.”
Teachers CEO Jo Taylor told The Globe and Mail in June, 2021, that while tech valuations in general were “very high,” a disruptive company that delivers on its potential can make an investor’s entry price “pretty irrelevant quite quickly. ... If you want to play in that space, you’ve got to be willing to bite the bullet on businesses you really have high conviction around and invest regularly.”
As part of the plan to emphasize tech, the pension plan is renaming the department Ms. Steedman leads as Teachers’ Venture Growth, and hoping to add 12 investment professionals to the current staff of 24. The department, which has offices in Toronto, Hong Kong, London, and later this year, San Francisco, will also focus on a narrower set of technology investments after starting the department as “sector agnostic,” Ms. Steedman said. The new focus will be on enterprise software, logistics technology and innovations to address climate issues.
Ms. Steedman said the plan is to make initial investments ranging from $50-million to $250-million per company in enterprises with “proven product-market fit” that generate revenues and have unit economics that point toward reaching break-even levels on a cash flow basis.
Ms. Steedman acknowledged the widespread criticism that large Canadian pension funds don’t invest enough early and growth-stage capital in domestic companies. She said that while her group’s mandate is global and doesn’t have specific Canadian targets, “we think Canada is a very exciting investment environment. ... We think there’s some fabulous entrepreneurs here. We’ve absolutely heard that dialogue on, ‘why aren’t the Canadian pension funds doing more’ and we’re out there talking to companies and continuing to map the landscape.”
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David Milstead
Sean Silcoff