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"I don’t know. I assume it’s real. It’s Kiki’s,” says Brian Gibson, former senior vice-president of public equities at Ontario Teachers’ Pension Plan. The youngish-looking fifty-something is responding to a question from a reporter about the provenance of what appears to be a massive Edward Burtynsky photo hanging in the boardroom of C. A. Delaney Capital Management Ltd., the investment management company run by fellow Toronto financialite Kiki Delaney. Gibson and his business partner, Rob Farquharson, have taken up space in her office until they can find a place of their own for their new fund, Panoply Capital Asset Management, which will launch in late June. That explains why Gibson is in Kiki’s boardroom, looking at her picture — one from Burtynsky’s recent China series that captures a seemingly infinite row of seamstresses in a massive manufacturing facility. A forceful and expansive work, it takes up most of the wall. But the question about its origin — a weak attempt at breaking the ice on the part of this reporter — comes off as a wee rube-ish, if not a bit ditzy.
This is the 31st floor of the TD Canada Trust Tower in the heart of Toronto’s financial district. Of course it’s a real Burtynsky. This is where original Burtynsky’s live.
Gibson makes no outward sign he’s registered the gaffe, but that’s of little surprise. One of his duties at Teachers’ was managing the fund’s “relationship-based” investing portfolio, following a not-very-well-known investment style similar to private equity where the return is generated by fund managers who work to make real changes in the businesses they invest in. It’s hands-on work, and much different from managing, say, a mutual fund, which simply holds stocks passively. You have to have real ideas about how to create new value in a company. But because you don’t hold controlling ownership stakes, you can’t demand changes be made; you have to be good at massaging and moving relationships without threatening or scaring off the egos involved. And that requires a certain degree of grace. “The way we do it, you never embarrass someone,” Gibson says. “That’s not good. If you publicly embarrass people and then go to Company No. 2, the door is not going to be open.”
No one opens doors like Gibson. Of the portfolios he oversaw at Teachers’ (global and Canadian equity), the relationship-based one brought in the highest, most consistent returns — 17.2% annually, a return investors outside of the Teachers’ family have long sought to share in. Now, as Gibson and Farquharson, another alumnus of the $108.5-billion pension fund, launch Panoply, outsiders will get their chance to invest with two of the most well-connected managers in Canadian capital markets.
The plan is ambitious: to raise a billion dollars from institutions and high-net-worth individuals. Panoply will use the money to buy “relationship” stakes in just six to eight publicly traded companies. This would seem to contradict the standard-issue investment-industry wisdom about diversification. But the demands of relationship investing require fewer holdings — you’ve got to meet with the board and make sure plans are being carried out while coming up with new ideas. But while the small portfolio may seem odd, according to the principals theirs is a very stable form of management. The holding periods are long, and the returns are consistent — which places the Panoply fund in stark contrast to the short-term, highly leveraged models that became the norm in the hedge fund era.
The term “hedge fund” has often been a bit of a misnomer. To hedge is to make more stable, to cut out volatility. And while that was the goal of the original hedge funds, something seems to have been lost along the way. Today, many have ended up leveraging debt and margin to juice short-term profits and attract investors, but then applying high management fees to allow managers to extract an overnight fortune. When the fund blows up thanks to all that debt, investors are left to swing in the wind. This fatally short-term business model now seems to be in full meltdown mode. The online Hedge Fund Implode-O-Meter at (www.hf-implode.com) indicates some 74 funds have blown up in the U.S. since mid-2007 alone.
Gibson and Farquharson have designed Panoply to be a clear alternative to the high-management fee, high-leverage model, and say they are working to bring a new sense of sound governance to fund management. Leverage will not be used to boost returns. The fund will be focused on long-term results. And compensation will be based on performance, not management fees, which will be just 75 basis points — less than half the 2% fee typical in the hedge fund industry. “I’m getting flack from other people because we are really reforming how fees get done,” says Gibson. “But I’m a bit extreme on this. I think our industry in general has got way too far away from what I think we’re supposed to be doing as professionals. Clients have been made poorer. You can get these huge performance fees for mediocre results, or no results.”
That is refreshing to hear. But there is another reason investors might think their money well-placed with Panoply. Gibson is 52. He’s at that age where an accomplished fund manager wants to put a capstone on his career. As much as this fund is about new ideas and good governance, it is also about legacy. Gibson doesn’t want to screw this up. “This is about reputation and high goals. It’s not about grabbing fees,” he says. “Before I retire, I wanted to see if I could create one of those high-quality firms of the type people talk about and say, ‘Those people are smart. Those people have been around a long time. What a great reputation.’ That’s what I’m trying to build. It’s more about the last mountain to climb.”
To do that, he and Farquharson have put everything on the line. They are fastidious about the details of the fund’s design. And they have taken a radical step to win investors’ faith: they have committed their net worth to the fund and have pledged to keep it there until they go out of business or die. “We’re investing all of our money,” says Gibson. “Presuming we get our performance fee, all of that will be reinvested. We’ll be eating our own cooking for a long time.”
Can they pull it off? Well, Gibson’s fingerprints are all over many of the stories that show up on the front pages of the business section. It was he who in 2001 led the hostile takeover of Luscar Ltd., a rusting hulk of a coal company, and in 2003 was instrumental in consolidating its operations and establishing Fording Canadian Coal Trust. He also played a major role in the consolidation of the Canadian space industry under MacDonald, Dettwiler and Associates Ltd., and oversaw some 15 other similar relationship investments in his time at Teachers’. “You’d be surprised,” he says, “if I told you how many companies in Canada where something like this has happened because of us. Nobody even knows us.”
That’s by design. Key to making relationship investing work is the ability to move behind the curtains without drawing attention, which often means leaving credit to someone else. It’s a form of fund management that happens in boardrooms, at meetings and on the phone — no fancy computers or millisecond trading programs. It is real business, requiring finesse and an ability to persuade. “If this was private equity and we had 51% or 100% of the company,” Gibson says, “getting the people to listen to you is pretty easy — ‘What part of “jump” don’t you understand?’ But try doing that when you have 10% or 15%. And especially if it’s a founding family or founding entrepreneur who has 30% or 40%. The real art and challenge and skill is, How do you take a sizable stake, but not control, and successfully convince people to do different things?”
The fund managers’ approach ends up being consultative. “Sometimes,” Gibson explains, “we get to a company and they say, ‘Well that’s an interesting idea, but here’s why it might not work. But if we did this, this and this…’ And we’ll listen to that.’” The opportunities exploited could be around an industry consolidation, or some specific trend that isn’t yet recognized by the market. “Sometimes when we go to a company, often it’s something management was already thinking,” says Gibson. “They just need someone to say, ‘Yeah, good idea.’”
There is also a willingness to take a long-term view. Where some shareholders bolt at the first sign of trouble, Gibson makes a point of sticking with a company — “We’ll stay in and roll our sleeves all the way up,” he says. That approach has the benefit of creating goodwill in the boardrooms of corporate Canada. “He’s looking for return. He’s not passive. But he is prepared to take a long-term view,” says Charlier Fischer, CEO of Nexen Inc, a Calgary-based global energy firm. “He’s not swinging from the sidelines trying to tear it apart. He’s looking for people with good ideas and will work to see that through. Companies appreciate that. I’ve got lots of time for him.”
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