The Exchanges

Q Well, let's start breaking down The investment activity. So you have this structure, has longer duration capital, more flexibility in what you can do with the companies, and an aligned fee structure. Where do you start looking for the types of companies that you can attract, particularly those that someone with a traditional private equity structure might be less advantaged structurally?

A So I will tell you where we're not looking first. We're not looking in big auction where people want to maximize the value of their business, and it's a Totally legitimate activity. And there's a lot of those auction where several people will come in and bid. So that really is not of interest to us. So what we're looking are people that have a significant influence as to who their partner is going to be for the continued growth of the company. And where we found success so far are in companies that are founder led. That I've been honed by private equity, and private equity has done an amazing job in this first round at professionalizing the business, at helping them grow, have processes in place, determine their strategy, but now the private equity firm wants some liquidity. The founder doesn't want to get into a situation where they're going to be levered six plus time. They're going to have very aggressive either cost reduction or acquisition plan to make The so-called infamous 20% return that private equity tries to achieve. And more importantly, they don't want to get a partner that in five years will need some liquidity and where they will need to go again and find a replacement because it's a very disruptive activity for a company to change the partnership, the capital structure. So our capital is valued in those situations where the founder has a significant influence on…

AI assessment note: “what we're looking are people that have a significant influence as to who their partner”

Q would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. And as you go out, when I think of other people who have similar type of duration capital, right, you think of Berkshire Hathaway and Warren Buffett, you could think of places like your former employers that do this directly. How do you go out and find the businesses that might be attractive?

A There's several ways of doing this. First of all, I have a team where the principal have collectively more than a hundred years of experience. Between Colm Lanigan and myself, we've managed a huge pool of capital and been big fund investors and therefore followed four, five, 6000 underlying companies in those funds. So we know the market pretty well and the situation I just described to you. So first the team experience and the team relationship is important in origination. The other element is we've become a new client for the street. So we've got a parade of investment bankers that are coming here, but to their credit, the investment banking community is really starting to think of this long-term capital as a different asset class. Some are better than others at it and have like now dedicated team to, to finding opportunities in that space. So intermediaries is obviously one source of transaction, but I think the big differentiating factor is the BlackRock network. And all of my colleagues now understand what our business is and they, in their day-to-day activity, they will think of LTPC as a potential acquirer or potential solution for some of their businesses. We have our active equity business that can provide a number of leads. Our family office business, I think, is going to be tremendous, and we're building relationship. My partner, Dax Kadam, is, is really building the…

AI assessment note: “team relationship is important in origination. The other element is we've become a new client”

Q So you're sitting at the top of this plan that's doing extraordinarily well. What was the impetus for making a move?

A If you look at my career, I've always been a builder of teams and a builder of businesses. And on top of that, like I said, I didn't necessarily choose to become a manager. It sort of happened to me. And I think I did a relatively good job in both instances, but my passion was about investment and, and I've always felt that there was a gap in the strategy, solution, product offering, call it whatever you want. In terms of true long-term investors, and certainly a lack of evolution in the traditional private equity model, and that this lack of evolution had been to the detriment of the investor. So I'd been trying to build more long-term strategy within our pension plan, but those plans are long cash and short human capital, so it was difficult to get the origination capabilities that we needed And probably more importantly, the value creation and asset management capability that we needed to really make a long-term strategy fruitful and impactful for the business. So at the same time as I was sort of thinking into this, Larry and Mark Wiseman approached me with this idea of a true long-term private capital fund with permanent capital and one that had no conflict, that Didn't have a legacy business to protect, and quite frankly was focused because it was starting from a blank piece of paper on how to have a more equitable distribution of the so-called profit between the sponsor,…

AI assessment note: “Larry and Mark Wiseman approached me with this idea of a true long-term”

Q So have you thought about it from your perspective? Because I hate to tell you, but I don't know that you and I have permanent lives. So a lot of times people invest in a fund, and they try to think about how motivated are the principles? How long are they going to be around? But clearly, this pool can be around for a lot longer than you will be.

A I think one of the thing I've always done while building team is to ensure proper succession. And one of the things I'm really proud is that every time I moved up, I was able to promote somebody internally. And even when I left CPP at someone that was there. So, so succession has been the big focus of mine. And if you look at how the team is built right now, there's a layer of us, more senior people that are in our mid fifties that probably have another, you know, Let's call it seven to 10 years before we decide to do something else, and the next generation is really in their sort of early to mid forties. Seven years will be absolutely prepared and ready to take the leadership of the group. I'm really, really happy with the quality of the people that we brought on board. I can't think of a better team that has been assembled, and really those people, when I was selecting them, this layer of people, the next generation, We'll have more than enough time to prove themselves to our current investors. Every fund has had, especially recently, to go through transition, and they understand that long-term capital means that the capital is going to be for longer than some of the investor. And as long as we keep the communication open, and we tell people, and there's no surprises, because that's really, you know, if people were to leave quickly, That would have a real negative impact. But…

AI assessment note: “one of the thing I've always done while building team is to ensure proper succession.”

Q capital. So it doesn't mean that you're going to buy something and own it forever. And the other is this sort of swapping of deal teams. And I'm wondering from the management team's perspective, on the one hand, you're not necessarily saying you're a permanent owner, but then every couple of years, you've got another team, and that team might scrutinize you in a different way. How does that work?

A So on the recycling of capital, just to make sure the primary cash flow from one company will be dedicated to continue to grow that company. So we will only use the extra cash flow to either continue to grow other companies or to buy new ones. So the primary target of the cash flow will be the growth of the company producing them. I think that the manager viewed that positively because they want to be challenged. They want to make sure that they don't miss anything and having the support of A machine, like, we can provide them, and this is just the deal team. It's the entire ecosystem here that has information about macro, micro, the competition that we can help them rethink their business model. Because, like I said, they don't want to sell the company. They want to continue to grow it, and any input to that thesis is really, really important to them. So Right now, the discussion that we're having with sort of a handful of founders on how we intend to do it has been received very positively.

AI assessment note: “I think that the manager viewed that positively because they want to be challenged.”

Q Should we take a step back in just the private equity environment right now? The one thing we all hear is prices are really high. How do you invest in that landscape?

A So I've been thinking that prices are very high since probably 2011, and if I had stayed on the sideline, I would have missed greater portion. I think we are very long-term fund. Our goal is not to try to time the market. Our goal is to invest the money, and we don't have a finite investment period, which is probably better than traditional private equity. And therefore, our working assumption is over the next four to six years, we'll deploy the capital, but we don't have to. And without trying to time the market, yeah, we'll be first very, very, very disciplined in this current environment. But second, we will also not deploy it very quickly and make sure that it's spread over a number of years to avoid the traditional vintage issues.

AI assessment note: “make sure that it's spread over a number of years to avoid the traditional vintage issues”

Q So as you evolved from doing deals and looking at managers to running a private equity group, broadly defined, to running a pool, what lessons did you learn that shifted from being the on the ground investment guy to managing a team of investors?

A This evolution from being a deal person to becoming a manager happened to me. I didn't really plan it, but I think my experience in the deal making space really helped me be a better manager. Then you become the head of the group. You get involved strategically in some transaction and even less so as the CEO of a large pension plan. But when you do, I think that in the field experience really help you focus on the most important thing in the transaction. And then I was chairing the investment committee for those groups. And again, the experience that you get on a deal by deal basis is really important because When somebody has spent three, four, 500 hours on a transaction, they're the expert. You're not. But you hope that your training, that your experience, that the fact that you've seen so many transactions is really going to help you focus on the right question to ask in order to help the deal teams develop their due diligence and their investment thesis.

AI assessment note: “help you focus on the right question to ask in order to help the deal teams”

Q So as you turn to this different model of approaching the private equity market, how do you start with creating a structure that's conducive to, as you said, longer term ownership of businesses?

A So we innovated in several ways, and I think the overarching principle of innovation in this is that we didn't try to design this product in isolation and write a PPM and send it to investors and say, hey, this is what you should invest in. The firm approach some of their best clients, some of the clients who have the largest private equity practice and say, listen, we have this idea. He is sort of a straw man. Help us in partnership to build something that you would invest in. And I think that that is really, really different in a world that is more used to divide and conquer. Having been a big LP in, uh, in several of the traditional private equity fund, I think I, I can recognize that this was a very novel approach. And then we looked at the things that those investors have told us. And one of the thing was the Permanent nature of the capital, and again, being able to make decision of keeping or selling company, not based on having to raise a future fund, but really having a structure that allow us to make that decision based on the company itself. Then the fee structure, and the fee structure in private equity hasn't really evolved. Everybody talks about the two in 20, now it's not two anymore, but initially when you look at The management fee. The management fee was there to cover the operating costs of the management company, and as the fund grew 10, 20, 40 times, the fee…

AI assessment note: “one of the thing was the Permanent nature of the capital”

Q Once you're sitting down with a company, you've done your due diligence, you're interested in trying to buy the company, no matter what, it's still competitive market. What are the key points of what you try to drive home that's different about your proposition?

A So you're right. I think that true proprietary transactions are very rare. They exist, but they're very rare. I'd say that, first of all, it has to come from, like I said, the owner or the manager of the company that sees true value in long-term capital and want to remain involved for the foreseeable future in the growth of the company. But where I think we're making a difference is that, you know, first of all, we don't need Put call liquidity event negotiated in advance. We will have either control or shared control of the entities that we're buying and have mechanism where we don't need to sell and we need to determine with our partner when is the best time if ever to sell the company. So, so, and that relieves a lot of the manager of the pressure of the short term performance. The other part is that we can bring a geographical footprint and relationship with governments, corporate regulator throughout the world that no other people can bring. And finally, the last thing I think is that if you look at the spectrum of value creation, the management team that we're supporting is key in our investment decision. We don't want to tell them how to run their business. We already know that we're buying good businesses, but here are the value creation aspect that We can bring to you, and I think that that's very attractive to a lot of managers.

AI assessment note: “where I think we're making a difference is that, you know, first of all”

Q And how do you think structurally about the types of businesses you will want to sell?

A There's going to be a situation, and I've faced that situation in my prior life. So first of all, we're fiduciary to other people's money. So we want to make sure that we make the best decision in the interest of our investors. So there will be a situation, again, where we got in there with a long-term view, and then we realized that we won't be able to deliver the kind of returns that we've represented to our investor, and we need to Think of strategic alternative, including a sale of the business. There will be other situation where even if we're in for the longterm, we will in an unsolicited fashion received offer from third party that we will need to consider. And in some cases, those offer will be so good and so hard to replicate in terms of longterm growth of the company that selling it at that time will be the right decision. And in other circumstances, we will be victim of our success. One company may become so big in the portfolio that for risk management and portfolio construction reason, we will want to downsize the way our ownership in the company and certainly a partial sale will be considered.

AI assessment note: “we realized that we won't be able to deliver the kind of returns”

Q The Canadian model of much more than you see, say, in the States or abroad of blending internal management and external management. What did you see as the pluses and minuses of overseeing that model?

A It's hard to put vision and government in the same sentence, but I do think that the government in Canada got it right in terms of making sure that the large pool of capital were managed in a commercial and professional way. So they made sure that we had the right governance, governance that is really independent from them. And they made sure that people were compensated in a market way so that we could attract talent. What are the plus? I think that by internalizing a lot of the activities, you make sure that you reduce the friction costs of external managers. And then the real question for you is sort of a completion strategy is really to focus on things that you think you can develop the expertise internally and be really good at. And let the niche sector in the ends of external managers. So I think the model is a proven one. I think it's a very good one. The various pension plan in Canada are in different situations. Some are still in net inflow of contribution and will be for the foreseeable future. Other are in deficit in the sense that they have more benefits to pay than the contribution that they receive. And therefore, that will also impact the strategy that some of those funds will take, and the latter will tend to disintermediate even more to capture the fees that they're paying so that they can grow their fund even faster.

AI assessment note: “What are the plus? I think that by internalizing a lot of the activities”

Q So as we walk through this, I think it helps to start with this point you made about the traditional private equity model and that playbook. So how would you define what traditional private equity firms are doing today?

A A lot of private equity firm have a very short term approach to value creation in companies, and it's a model that has worked really, really well for them. But if you look at the traditional deal, they buy either companies where there's a lot of inefficiency and try to solve for those inefficiencies. They have a very aggressive plan within the first two years of ownership. To transform those companies, they also use leverage to a point where not in an environment like this where money is almost free and things are going up, but everybody remember, and we all remember how those capital structure put a lot of those companies in jeopardy, quite frankly. So to the extent that the model work in an environment where There's growth, and you can affect those changes within the first few years of ownership and then prepare the company for a sale in the next couple more years. You have a fairly short time frame to execute, and the economic environment and the timing plays a significant role in the success or not success of a particular fund vintage. And they're very deal focused. What we're trying to do here is really to Be more company focused and look at buying good companies and making them better and making them great. As my partner, Colm Lanigan says, cost reduction is not really a strategy, so we are extremely focused on growth, and there are some of the firm out there that are als…

AI assessment note: “A lot of private equity firm have a very short term approach to value creation”