Investment funds: Friends with money

Can you put a price tag on relationships? Sure you can. It's $1 billion. At least, that's the idea behind the ambitious new fund Panoply Capital Asset Management, planned to launch in late June.

“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 ( 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.”

Bob Bertram, executive vice-president of investments at Teachers’, says Gibson is also good at seeing where companies fit into larger trends. “He can read the macroeconomic context and see how companies fit into that,” says Bertram. Typically, Gibson finds underperforming companies in out-of-favour sectors that look poised to boom, and then helps get those companies in shape to profit from economic trends two years down the road. Fording, which has profited on the boom in coal prices, is a good example. “That deal is a good cookie-cutter for how we do these things,” says Gibson.

But if big ideas are currency, he and Farquharson are going to need a steady stream of new ones to keep their billion dollars busy. Key to providing that stream will be Gibson’s broad and well-tended network of contacts. “You really can’t underestimate the value of having a huge network of personal relationships,” he says. “I know the CEOs of so many companies. Many of the ideas will come from that.” Of the 17 relationship-based transactions Gibson did at Teachers’ over the past eight years, only two of them came from an investment banker. “And one of those two came from a friend of mine,” he says. “Everything else came from us or people who called us.”

Proof of the depth of Gibson’s network arrives in an e-mail a few days after our meeting. Asked whom would be good to talk to about his career, Gibson sends a list that includes Chuck Winograd, group head of RBC Capital Markets; David Thompson, retired deputy chairman of Teck Cominco; Michael McCain, CEO of Maple Leaf Foods; Mike Tims, the chairman of Peters & Co., an influential Calgary oil and gas brokerage; Bob Dorrance, CEO at TD Securities; Gerry McCaughey, CEO of CIBC, along with Mark Wiseman, Clive Beddoe and Purdy Crawford. And the list goes on. “The No. 1 asset we have at Panoply is three decades of building up relationships with people in all kinds of businesses,” says Gibson.

In fact, he adds, the network has paid off even before Panoply has opened its doors. “We’ve already got three good investments on our desk. When people heard we were starting our own fund, they called us and said, ‘Hey, guys, can you help us solve a problem?’ And they’re not calling because it’s Panoply or Teachers’, but because it’s Brian and Rob.”

It’s no stretch to say that over his career Gibson has turned himself into one of the central nodes in Canadian capital markets. But maybe that’s not surprising. He grew up in North Bay, Ont. — dreaming of being an accountant, of all things. “I don’t know how I got this idea,” he recalls. “I thought it would be really interesting and exciting.” Chalk it up to life in northern Ontario? Maybe, but finance seems what Gibson was born to do. He took business at Laurentian University, and attended classes toward his Certified General Accountant certification at night. “But I found out some things,” he says. “Accounting, at least for me, is boring. It’s like standing on the side of the field keeping score when people are playing soccer. And I wanted to be playing. I wanted to be the guy making decisions. I wanted to pull the trigger.”

Luckily, he met a wealthy local entrepreneur, Robert Morel, the owner of a local group health-care administration business, who hired him to manage his accounting department and who happened to have a million-dollar trust fund that needed managing, too. A million dollars was a big deal in mid-’70s Sudbury, and the venture ended up working out well. Gibson realized he enjoyed investing money. He gave up on the accounting, moved to Toronto, and got a job at a small company called Halifax Insurance, where he was hired to run their investment department. Why not? He had managed that million, plus he had glowing letters of recommendation from every broker in Sudbury. “I don’t know if no one else applied for the job or what, but I got it,” says Gibson.

On Bay Street, there are two camps, the “buy” side and the “sell” side, and these two tribes are locked in what often resembles a state of perpetual war. The buy side — pension funds, insurance companies, trust funds, mutual funds — amasses securities to create portfolios that are steady, long-term performers. Arrayed against these firms are the personalities and companies that make up the sell side — the high-wattage investment banks and brokerages. The interests of these two camps are perfectly non-aligned. Sell-side firms want to get product sold as fast and expensively as possible. Buy-siders — especially in the more conservative pension funds and insurance companies — spend a lot of time analyzing that product to figure out if they’re getting screwed.

Gibson has logged a lot of hours in some of the buy side’s most governance-minded firms, and he carries with him strong ideas about the importance of long-term stability and a well-developed eye for shoddy paper. “The other thing Brian is good at is analyzing securities,” says Bertram. His accounting background helps him decipher financial paperwork and figure out where investor interests diverge from the interests of the sell side. “Our second-biggest asset is that we’re old-fashioned,” Gibson says. “We actually read the footnotes.”

After 19 years on the Buy side, in 1995 Gibson ascended to the holy temple of good governance, Teachers’. Farquharson landed there not long after. Like Gibson, he started early: he’d been an investor since 18. After getting his MBA from Queen’s in 1988, he ended up at a company called Financial Models Co. (now SS&C Technologies), a producer of back-office software for the investment industry. The FMC program happened to be the system of record for 60% of the money being run in Canada, including at Teachers’. When the organization asked him to help search for a new system, Farquharson made a proposition: he would help, but after two years he’d have a chance to interview with Teachers’ Equity.

Today, Gibson and Farquharson are proud to have been part of transforming Teachers’ into one of Canada’s most globally well-respected financial organizations. They were instrumental in taking a small, quiet pension fund that hired international money managers to run its global equity portfolios, and turning it into what it is today. “One of the first things I did when I arrived at Teachers’ was to go and visit these managers. They were very good, but I literally said, ‘You know what, these people, they’re smart, but they’re not any better than us. There’s no reason that we can’t in Toronto manage money all around the world.’ And so that’s what I set out to do,” recalls Gibson. “That was the mountain to climb.”

But what Gibson and Farquharson also did at Teachers’ was evolve their thinking about and practice of relationship investing. Early on, Gibson put those types of investments into a specific relationship-based portfolio. “I had always done these on an ad hoc basis, but when I got to Teachers’ I said there’s enough opportunity here that we should make it a special focus,” he recalls. “And so from 1999 up until January, when I left, we built up a $7-billion portfolio.”

The challenge now is to survive the next leg of their journey. Panoply has been rigorously designed with good governance in mind. Key to this is the compensation, which will come from performance fees rather than management fees. But even there the bar has been set slightly higher. Gibson and Farquharson will have to earn market rate plus 1% before they get paid. But to keep them focused on long-term performance, they will also leave those performance fees in the fund. Why? “To make sure we don’t have one lucky year and make a lot of money and have the portfolio blow up in Year 2 — you read about those every once in a while. Year 1, if we have great results and get a performance fee, that money stays in the fund. Year 2, the fund falls apart, we lose all that money.” Where’d he get such crazy ideas about compensation?Some of them, he admits, he’s “stolen from Teachers’. People say, ‘Well your hurdle is so high, you’ll never earn it, you’ll get discouraged.’ Well, it only seems high. But that’s normal life at Teachers’. That’s normal life for me.”

But don’t think governance ever gets in the way of the drive to generate returns. Whenever Gibson strays into governance talk, he is careful to mention its practical benefits. “For me, I like it because it’s the best return you’ll get in public equities,” he says. “Remember, there’s no leverage here. Our round number is 17% with no leverage. If you took that number and applied the leverage private equity investors would, you’d have numbers better than most private equity people. But we don’t use leverage. Rob and I just don’t believe in that.”

Another thing they don’t believe in is using their clout to take on management publicly, à la any number of headline-grabbing activist hedge funds. “We call this relationship investing for a very particular reason,” explains Farquharson. “A lot of people talk about things like activist investing. I’m sure it’s a fine word. But the people that have operated under that term — let’s put it this way, it doesn’t work for us. If you have a reputation for going in and throwing grenades, then people aren’t going to want to deal with you the next time around. It’s not always sweetness and light with us, but our investments have all actually moved the real business value forward. And almost always in ways that everyone ends up being very happy with. We don’t put money in our pockets, and the pockets of investors, at the expense of other shareholders or bondholders.”

Gibson concurs: “Part of the reason we do it this way is it suits our personalities. It just doesn’t suit me to go and wreck a company so that I can make a few dollars for myself. I just can’t do that. But you also make a lot of money doing this. So why not? You don’t need to lower your standards.”

Remain on the good side, stay in the light — and make money? Why do it any other way? Gibson tells a story about a certain public company that has to make some important decisions about strategy, decisions that will have a dramatic effect on its capital structure. When the board found itself drowning in recommendations from various investment banks, the directors called Gibson. “They send them to me and say, ‘Brian, tell us, what do you think? Whatever you think, that’s what we’ll do.’ That’s what comes out of a long-standing relationship.”

I don’t bother to ask him what company he’s talking about. I know enough about Brian Gibson to know he’s going to keep that a secret.