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Canadian plans answer staff dilemma

KPA Advisory Services’ Keith Ambachtsheer

Canadian pension plans have found a way to attract top investment professionals for their private equity direct investments staff, industry observers said.

Salaries aren't as high as those paid by the largest private equity firms, but senior investment staff members could earn a salary "more akin to what a middle-market private equity firm will pay,'' said Jonathan Goldstein, a partner at recruiting firm Heidrick & Struggles, who manages the firm's private equity practice.

"They have found a way to compensate very well but it is at a discount to some of the larger private equity firms."

Mr. Goldstein, who has recruited direct investment staff for some Canadian pension plans, would not discuss exact compensation. But other industry sources put a middle-market salary in the $1 million-to-$2 million a year range.

"The question is, can this be transferred to the United States?" Mr. Goldstein asked. "I think that's going to be very challenging for many reasons. It's not just the dramatic increase in compensation that would be required; you will have to add a significant amount of individuals and most likely exit many of the current staff over time."

The C$176.6 billion ($140.2 billion) Ontario Teachers' Pension Plan in the early 1990s became the first public Canadian plan to begin direct investing in private equity, saving on fees normally paid to private equity partners and building investment expertise that resulted in higher returns than U.S. public plans, said Keith Ambachtsheer, president of KPA Advisory Services and director emeritus of the Rothman International Centre for Pension Management at the University of Toronto.

He said other public Canadian plans emulated the Toronto-based teachers plan, but major U.S. plans stuck to a more traditional private equity structure. Mr. Ambachtsheer said the Canadian plans got ahead of their U.S. counterparts because they had boards with more expertise and were willing to pay multimillion-dollar salaries to attract investment talent.

Claudia Zeisberger, senior affiliate professor and founder and academic director of the private equity center at the INSEAD Business School in Singapore, said a pension board that understands the risks and opportunities of direct investing is necessary to succeed. Ms. Zeisberger, who has studied the direct investment program at Ontario Teachers, said the program was successful because staff "was able to execute (build a direct program) under a patient and well-informed board with the right people that made decisions fast and allowed (the investment staff) to act quickly.''

She said Canadian pension boards have members with extensive knowledge of the financial industry compared with U.S. pension boards and their mix of board members, including politicians. "Without them being knowledgeable about the risks in PE investing overall and direct investing, I wonder if they will have the patience it takes to work through the highs and lows of a direct investment mandate," she said.

One former top direct investment official of a Canadian pension plan, who now works for a U.S. private equity firm, said board members with financial expertise were essential, questioning staff about the merits of deals.

"The CalPERS board and other pension plans, with their mix of politicians, union members and bureaucrats, would not be able to offer that feedback," said the official.

In comparison to CalPERS 20-year net annualized private equity return of 11.3%, Ontario Teachers has seen a return of about 20% annually over the past 25 years, said Jane Rowe, the plan's senior managing director and head of private capital, in an email.

Ms. Rowe said the plan has $27 billion invested in private markets, with about $18 billion in direct investments and the remainder in traditional private equity funds.