OMERS Set to Double Its PE Exposure by 2030

Lina Saigol and Selin Bucak of Private Equity News report that OMERS is set to double its private equity exposure by 2030:

The head of buyouts at one of Canada’s largest pension plans says the amount of cash it plans to invest in private equity will double to around C$30bn in the next 10 years.

Mark Redman, global head of private equity at Ontario Municipal Employees Retirement System, says the pension plan expects total assets under management to increase from C$100bn to C$200bn by 2030, with 15% of that targeted at private equity.

Omers, like its larger Canadian peers, is under pressure to boost returns as plan beneficiaries live longer and because slow economic growth and low interest rates are a drag on fund performance. Many large North American pension funds are allocating higher amounts of capital to alternative investments, including private equity.

The Canada Pension Plan Investment Board has boosted buyout assets to C$93bn, up from 20.3% of the total fund in 2018 to 23.7% in 2019. The California State Teachers’ Retirement System, which has $226.5bn in AUM, and the California Public Employees’ Retirement System, which has $355bn in AUM, have both also adopted new models that emphasise direct and co-investments in private equity to boost returns and lower their fees. Omers’ provincial peer, the Ontario Teachers’ Pension Plan, has C$32bn in private equity assets.

Redman says Omers plans to further grow and strengthen the firm’s private markets business. “You stand still in this business and you’re dead,” he says. “The world is moving quicker and quicker.”

The buyout arm currently has $14.2bn in assets under management, with 85% invested directly. About 21% of that is invested in Europe, worth about $3bn.

European operations

Redman moved to Europe 10 years ago to set up private equity operations in the region.

The 51-year-old struck Omers’ first European deal in 2009, taking a minority stake in commercial lender Haymarket Financial. Since then, the equity cheques for acquisitions have gone from C$100m to C$600m.

Over 10 years, the private equity investments have delivered an internal rate of return of more than 16% net, according to people familiar with the fund. Omers declined to comment.

So far, Redman’s focus has been on the UK, Benelux and France. In 2018, Omers acquired London-based recruitment firm Alexander Mann Solutions in a $1.1bn deal. The fund also bought French industrial measurement company Trescal for €670m in 2017. Now, Redman has his sights on opportunities in other geographies, mainly German speaking Europe.

Redman is also planning to increase the firm’s investment in private credit. Pension funds have traditionally steered clear of private credit, but it has become increasingly popular recently as yields elsewhere have become hard to come by. Calpers’ chief investment officer Ben Meng said in a December board meeting that the pension fund should include private debt in its portfolio as well. Many large buyout firms have already allocated billions of dollars to specialised debt divisions, making the sector increasingly competitive.

Redman said it’s important for Omers’ venture capital arm to work closely with the private equity division.

“Venture capital might only account for 1% of the balance sheet, but it can influence 99% of it,” Redman says. “There are obvious synergies between the two – one world disrupts the other – and so it makes sense to bring our colleagues into discussions.”

London hires

Omers Ventures opened an office in Silicon Valley in January 2019 as part of the group’s plans to find new businesses to invest in. A few months later, it set up a branch in London. The pension fund hired former Balderton principal Harry Briggs and Tara Reeves, the co-founder of carsharing company Turo. In March, it launched a €300m fund targeting the European market and in December hired a former Uber executive as managing partner.

Other financial institutions, including Bank of Montreal and the multinational technology company Cisco have also committed cash to Omers Ventures. The unit has so far invested $500m in 41 disruptive technology companies and has $700m under management. In Europe, it has invested €76m into companies including content management infrastructure provider Contentful, insurance tech startup Wefox, and digital veterinarian FirstVet.

Redman says the fund is proud of what he calls “cuddly capital”– the reputation of Canadian pension funds as being “the nice guys” of private equity. “As part of a pension fund, we need to take a more conservative approach. We’ve been deliberately slow and steady doing one to two deals a year.”

He added he isn’t under the same pressure as traditional buyout groups to raise third party capital. It also doesn’t have to pay carried interest out to its investment teams.

Redman’s business operates with a smaller team than some of its much bigger buyout rivals. Omers Private Equity has 50 executives globally, with 16 based in Europe. The hit rate in terms of offers made versus deals won ran at about 50% last year.

It typically holds its investments for one to two years longer than the average three to five year holding period for buyout groups, so it can afford to be more patient.

OMERS Private Equity has been around for 30 years and their approach is summarized below:

They are direct investors with deep experience and are proactive and nimble.

One caveat, however. The article above rightly mentions the  buyout arm currently has $14.2bn in assets under management, with 85% invested directly.

It's critically important to understand that 85% invested directly comes from co-investments with their general partners where they pay no fees and bidding on companies they sat on boards through their fund investments with general partners (typically when a fund winds down, they can bid on a portfolio company if they like it and want to keep it longer in their books).

On top of this, OMERS Private Equity has done some purely direct deals on its own where it originated the transaction but this is a small percentage of direct deals (negligible).

I mention this because it's important to understand the bulk of direct deals emanate from fund relationships, either through co-investments or bidding on a portfolio company when a fund winds down.

This is why Canada's large public pensions have maintained or increased their private equity exposure while lowering overall fees. It would be impossible and very expensive to maintain or increase these allocations via fund investments only (you still need the fund investments for co-investment opportunities and to bid on individual portfolio companies when a fund is winding down).

[See important update clarifying OMERS direct PE program below at the end of the comment.]

 Now, OMERS Ventures only has a billion under management but as Mark Redman states above: “Venture capital might only account for 1% of the balance sheet, but it can influence 99% of it. There are obvious synergies between the two – one world disrupts the other – and so it makes sense to bring our colleagues into discussions.”

They have hired impressive people to run OMERS Ventures and got some investors including Cisco to commit capital to it.

In the article, Redman notes they have captive clients so they don't need to raise funds like traditional private equity firms and they don't pay out carried interest to their investment teams (although I'm not sure this applies to OMERS Ventures because how else did they attract these high-profile people to manage it?).

Anyway, OMERS has been leading the pack in terms of allocating to private markets for a very long time. They started this trend early and have build on it. I have no doubt they will double total assets and their current PE allocation in 10 years.

What is interesting to note is that CPPIB allocates 24% of its total assets to private equity all over the world which the highest allocation to the asset class and the main reason why CPPIB has outperformed its peers over the last ten years (not the only reason but main reason).

You should go back to read my recent comment on why BCI is ramping up its direct PE deals to understand how some of Canada's large pensions remain under-allocated to PE, much to the detriment of their clients or plan members.

OMERS will be competing for direct deals with its large Canadian peers and other funds all over the world ramping up their direct deals. It needs to have a global presence and attract the right talent to compete and thrive.

In other OMERS related news, the organization announced their CEO, Michael Latimer, will retire on May 31, 2020 and Blake Hutcheson will assume the role of CEO on June 1, 2020. I went over this announcement here and think very highly of both men.

Also, Chief Investment Officer reports that OMERS has selected Annesley Wallace to serve as the fund’s new chief pension officer, replacing Blake Hutcheson, who recently left the position to become CEO:

The system named Wallace to the position on Tuesday, the Globe and Mail reported, after she served as senior vice president of pension services and communications for nearly two years.

OMERS announced Hutcheson’s appointment last month. He succeeds Michael Latimer, who had a two-decade run at the organization, serving six of them as CEO. He will formally step down from his position and retire on May 31.

Wallace previously served as managing director of infrastructure at OMERS between 2016 – 2018, and served as vice president of OMERS Infrastructure (called Borealis Infrastructure at the time) for nearly four years before that. She currently sits on the board of directors at Infrastructure Ontario, Alectra, and Bruce Power.

As senior vice president, Wallace oversaw a transformational modernization of the pension’s IT services, intended to improve the administration of the pension plan. She also led a team that provides services to OMERS’ 500,000 pension plan members and 1,000 employers across Ontario to increase member and employer engagement and satisfaction.

Latimer, whose departure brought about the flurry of promotions within the firm, said in a statement, “As the outgoing CEO, I would like to thank each and every employee of OMERS, past and present, for their contributions to our significant growth over these years. I would also like to thank our Board of Directors for their support. Without both, achieving our goals would not have been possible.”

Under Latimer’s leadership, OMERS’s assets have grown from $65 billion to over $100 billion, with a consistent generation of 8% in annual net returns, improving the plan’s position to near full funding.

Michael Latimer has done an outstanding job but I do hope his successor makes OMERS a lot more transparent and raises the organization's public image on a global scale (I'm pretty sure he will).

As far as Annesley Wallace, Olga Petrycki, Director of Communications at OMERS was kind enough to share this with me:

Annesley has been with the Pension Services team for almost two years (most recently as SVP Pension Services and Communications) and under her leadership the team has started on a journey to digitally transform OMERS engagement model with its 500,000 members. As Chief Pension Officer she will be a member of OMERS Senior Executive Team, and will continue driving the innovation agenda across all of OMERS.

Before joining Pension Services, Annesley was a Managing Director with OMERS Infrastructure. She has a Masters Degree in Engineering and in Business Administration.

Quote: “I am grateful for the opportunity to lead the OMERS pensions business, as we continue to deliver exceptional services to our 500,000 members across Ontario. Today, we have an opportunity to further the member experience by leveraging the expertise and innovative mindsets of our teams. Ultimately our goal is to ensure that the value of an OMERS membership is felt on day one and grows with each member every step of the way into retirement. I am excited to be part of this journey with OMERS.” – Annesley Wallace

Bio: Annesley is a high-energy executive who thrives on unlocking the best from her teams in creating innovative and creative business solutions. She has developed a highly successful track record as a leader across various industries and roles in engineering, finance and pensions. Currently Annesley is Chief Pension Officer at OMERS, leading a team that delivers exceptional services to 500,000 pension plan members across Ontario. Prior to this role, Annesley was a Managing Director at OMERS Infrastructure, responsible for a multi-billion dollar portfolio of investments across energy, transportation and social infrastructure sectors delivering long-term value for the pension fund. Annesley is currently a Director on the Boards of Bruce Power and Infrastructure Ontario and holds graduate degrees in mechanical and materials engineering from Queen’s University and business administration from the Schulich School of Business, York University.

Ms. Wallace is a very impressive lady who is being groomed to take over OMERS one day and I congratulate her on this important nomination.

Below, a glimpse into OMERS Private Equity. Take the time to watch this, it's very well done.

Also, Mark Redman, global head of private equity at OMERS, talks with Bloomberg's Lisa Abramowicz on "Bloomberg Money Undercover" about direct investing, the potential bubble in private equity, the firm's "dry powder" and an opportunities in the late-cycle economy (November 12, 2019).

Valuations are definitely stretched but I'm not so sure there's any bubble in private equity -- at least not yet -- and think many pensions remain sorely under-allocated to this important asset class (see my recent BCI comment for details).

Third, Blake Hutcheson, incoming CEO of OMERS, talks about staying the course on the fund's investment strategy and how geopolitical issues factor into it. Great interview, I like what he said: "What got anybody here won't get you where you need to be in the future".

Lastly, last October, Blake Hutcheson, PSP's Neil Cunningham, CPPIB's Alain Carrier and Sophia Chen of Cathay Financial Holdings were part of a panel discussion hosted by the Milken Institute on stewarding long-term assets. Take the time to watch this discussion below, it's excellent.

Important update: Following this comment, I received this email from one private equity expert:

I am not current on the scope of OMERS investments where they are the sole investor, and sourced in the marketplace but I do know they did at least a few transactions like that, perhaps they have ramped up this activity considerably, probably by making a few very large investments.

I suspect it is quite likely this true direct activity is larger than you might expect, probably now the most significant of the large pensions. Whether successful of course takes some time and cyclicalities to know. But for example, I believe one of their disclosed US investments Caliber Collision was acquired from ONCAP, and has done quite well so far under the OMERS ownership.

It is not impossible to compete with the more intrusive ownership approach of the main buyout firms. You can just pay more, and combined with a lighter touch some companies will prefer an OMERS. Their teams headcount and backgrounds look suitable for direct investing of all flavors.

I thank this person for clarifying this for me and my readers as I suspected the bulk of direct investing at Canada's large pensions (in private equity) was done through co-investments with GPs and bidding on portfolio companies when a fund winds down to keep it longer on their books.

OMERS Private Equity employs a professional dedicated PE team deployed around the world that sources deals and directly manages the OMERS PE portfolio. It does compete for deals head on with large private equity funds and obviously as this person notes above, will pay higher prices but can keep these investments in their books for longer.

Unfortunately, none of Canada's large pensions break down purely direct private equity investments relative to co-investments and bidding on portfolio companies but it was inaccurate to imply that fund investments are the sole and most essential fuel for a direct PE program to achieve a strong deal pipeline, at least not in OMERS case. If you have anything to add, feel free to reach me.