Alignment of interest between institutional investors and their boards on the one hand and their portfolio companies on the other is key to building a successful investment strategy, suggest senior executives from two state pensions. Autonomy and board support in recruiting and retaining staff is also seen as key.
This emerged from discussions AsianInvestor had with Adrian Orr, chief executive of the $20 billion New Zealand Superannuation Fund, and Nicole Musicco, managing director for Asia Pacific at Ontario Teachers’ Pension Plan, which oversees $130 billion of assets.
They had been asked what they view as key investment lessons they have learned during their career. Asked the same question, chief investment officer of Singapore sovereign wealth fund GIC, Lim Chow Kiat, had stressed the importance of resisting peer pressure and retaining discipline.
Orr, meanwhile, said a major roadblock for CIOs in Asia over the past 10 to 15 years, when many were trying to expand their investment policy, had been the intransigence of their boards. Resistance to change is understandable, he noted, but if it takes several years to gain approval for a change in policy, that will affect the fund’s ability to implement timely and appropriate investments.
For instance, Orr noted that chief investment officers should ensure they have sufficient support from the board to attract, develop and retain the highest-quality staff in sufficient numbers.
His advice to asset owners looking to develop a broader investment remit is to make sure the board is fully supportive of a fund’s purpose and of the level of investment risk it needs to take to achieve that purpose.
Alignment is also important when it comes to making commitments to invest, especially as a minority shareholder in the private equity sphere. When it’s important to be getting agreement on 'reserved matters' – which typically concern planning rules for property deals, or ensuring an institutional investor has a say in its portfolio companies’ management compensation or decisions on capital outlay – alignment of different interests is essential to securing the investment.
Nicole Musicco, managing director for Asia Pacific at the $130 billion Ontario Teachers’ Pension Plan, said: “When we make minority investments in private companies, we have limited corporate governance rights compared to buyout or control deals, so we focus very hard on alignment with majority shareholders, the main sponsors and management.”
OTPP wants to ensure that the management treats its equity just as it does itself, noted Musicco. “Too often, minority shareholders have less control over how management transfers their equity."
This is especially true when the valuations of companies are large, as with many ‘unicorns’ (companies worth $1 billion plus), she said. In such cases, even a very small percentage of shares sold by main sponsors or management are significant enough in absolute-value terms to have a major impact on the incentives of those individuals as they operate the business.
What OTPP has found particularly helpful in some cases is to have exclusive lock-up agreements with portolio companies, noted Musicco. “Such lock-up arrangements would have similar timing to our exit expectations and typically are easier to negotiate than other minority protection rights.”
Because of confidentality, the pension plan could not provide examples of specific deals to illustrate these points.