OTPP Buys HomeEquity, Sets Ambitious Interim Net-Zero Targets
The Ontario Teachers’ Pension Plan Board is acquiring the parent company of HomeEquity Bank, best known for its reverse-mortgage business, from Birch Hill Equity Partners Management Inc. and other minority shareholders.
The purchase of the Schedule 1 bank is subject to regulatory approvals, expected in the first half of 2022. Financial terms were not disclosed.
Teachers’ said the bank is “well positioned for sustained growth” as more Canadians near retirement age, a prime time for reverse mortgages that provide loans against a home while the borrower continues to live there.
“HomeEquity Bank is an excellent fit for our growing portfolio of leading financial services firms,” said Karen Frank, senior managing director of equities at the pension fund.
“We believe the company has a high-quality management team, a solid value proposition for consumers and room to grow their business given Canada’s aging population as well as the increased attractiveness of staying in your own home as you age.”
Teachers’ interests in the financial services sector include stakes in Canada Guaranty Mortgage Insurance Company, Allworth Financial, Fairstone Financial, and RATESDOTCA. The pension fund, which had net assets of $227.7 billion at the end of June, is also seeking to capitalize on aging populations through investments in life insurance companies including Constellation Insurance Holdings in the United States and Greenstone in Australia.
Steven Ranson, chief executive of HomeEquity Bank, said Teachers’ long-term investment horizon and capital profile make it a natural fit for his business. The pension is expected to step into the the roles filled by private equity firm Birch Hill over the past nine years, including providing capital to the bank, he said.
The reverse mortgage business has grown significantly under Birch Hill’s ownership due, in part, to increased diversity of distribution channels, product expansion, and significant investment in marketing and technologies.
Disappearing workplace pensions and stringent stress tests on traditional mortgage renewals have also been cited among factors pushing seniors to tap home equity in order to pay debts and fund their retirement.
In an interview, Ranson said Teachers had approached Birch Hill about acquiring their stake after researching the reverse mortgage sector internationally, and the pension fund and private equity firm have been talking “for a while.” He added that HomeEquity’s performance was among the reasons Birch Hill stayed longer than is typical for private equity.
“Our results have just been so good for the last couple of years that I think they wanted to hang on to it for maybe a bit longer than they otherwise would,” he said, adding that the COVID-19 pandemic has increased the desire of seniors to remain in their homes.
“Nobody wants to move and they certainly don’t want to move into some sort of group setting,” he said.
In 2020, HomeEquity reported record originations of $820 million for 2019, up from $309 million five years earlier. The company’s results were in line with a near tripling of reverse mortgages in Canada during that period, reaching $3.92 billion by October 2019, according to figures from the Office of the Superintendent of Financial Institutions.
Ranson said HomeEquity is now “closing in on $1 billion” in originations for 2021.
A reverse mortgage typically carries a higher rate of annual interest than a traditional mortgage but no payments are made until the homeowner sells the house or dies, in which case the loan must be repaid by their estate. HomeEquity’s current one-year rate is 3.99 per cent, Ranson said.
Kevin Orland of Bloomberg also reports Ontario Teachers’ Pension to Buy Reverse-Mortgage Provider HomeQ:
Ontario Teachers’ Pension Plan Board agreed to acquire reverse-mortgage provider HomeQ Corp. from private equity firm Birch Hill Equity Partners Management Inc. to help build out its financial-services portfolio.
The parties expect the deal to receive the necessary regulatory approvals in the first half of 2022, Toronto-based Ontario Teachers’ said Wednesday in a statement. The purchase price wasn’t disclosed.
The deal would bolster Ontario Teachers’ financial-services holdings, giving it control of Canada’s largest provider of reverse mortgages as the country’s aging population bolsters demand for the financial product. HomeQ’s HomeEquity Bank had about C$4 billion ($3.1 billion) of assets as of November 2020. Toronto-Dominion Bank’s TD Securities advised Ontario Teachers’ on the transaction.
Birch Hill, based in Toronto, bought HomeQ in 2012 in a deal valued at about C$136 million.
OTPP put out a press release on this deal earlier today:
Ontario Teachers’ Pension Plan Board (“Ontario Teachers’”) announced today that it has entered into an agreement to acquire HomeQ Corporation (“HomeQ”), the parent company of HomeEquity Bank, from Birch Hill Equity Partners Management Inc. (“Birch Hill”) and the other minority shareholders of HomeQ. The completion of the acquisition is subject to receipt of required regulatory approvals, which the parties expect to occur in the first half of 2022.
HomeEquity Bank is Canada’s leading bank offering reverse mortgage solutions including the flagship CHIP Reverse Mortgage. HomeEquity Bank has a 30-year track record of helping Canadians 55 and older age in place by accessing the equity in their homes. The bank is well positioned for sustained growth as more Canadians near retirement age and seek innovative solutions to create income and build wealth.
“HomeEquity Bank is an excellent fit for our growing portfolio of leading financial services firms. We believe the company has a high-quality management team, a solid value proposition for consumers and room to grow their business given Canada’s aging population as well as the increased attractiveness of staying in your own home as you age,” said Karen Frank, Senior Managing Director of Equities at Ontario Teachers’. “Ontario Teachers’ has a long history of investing in successful financial services businesses in Canada and internationally and we look forward to supporting HomeEquity Bank during its next stage of growth.”
“We are excited about the value Ontario Teachers’ will bring as we continue to serve Canada’s rapidly growing retiree population. Its long-term capital profile, track record of delivering retirement solutions and our shared vision of making a positive impact on the lives of retired Canadians makes Ontario Teachers’ a natural partner for us,” said Steven Ranson, President and Chief Executive Officer of HomeEquity Bank. “I want to thank Birch Hill for its unwavering support for HomeEquity Bank over this past decade. Our partnership provided a reliable source of capital so that HomeEquity Bank could help more Canadians access the equity they built in their homes and live in the place they love.”
The company’s significant growth over the past nine years during Birch Hill’s ownership has been driven by strong leadership, increased diversity of distribution channels, product expansion, significant investment in marketing and technologies, and a revitalized brand that resonated strongly with the attitudes of Canadian homeowners aged 55 plus.
Ontario Teachers’ was advised by TD Securities Inc. as financial adviser, with Blake, Cassels & Graydon, LLP as legal adviser. Legal adviser to HomeQ was Torys LLP.
About HomeEquity Bank
HomeEquity Bank is a Schedule 1 Canadian Bank offering a range of reverse mortgage solutions including the flagship CHIP Reverse Mortgage™ product. The company was founded more than 30 years ago as an annuity-based solution addressing the financial needs of Canadians who wanted to access the equity of their top asset – their home. The Bank is committed to empowering Canadians aged 55 plus to live the retirement they deserve, in the home they love. For more information, visit www.chip.caAbout Ontario Teachers’
Ontario Teachers’ Pension Plan Board (“Ontario Teachers’”) is the administrator of Canada’s largest single-profession pension plan, with C$227.7 billion in net assets (all figures at June 30, 2021 unless noted). It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.6% since the plan’s founding in 1990. Ontario Teachers’ is an independent organization headquartered in Toronto. The defined-benefit plan, which is fully funded as at January 1, 2021, invests and administers the pensions of the province of Ontario’s 331,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.About Birch Hill Equity Partners
Birch Hill is a Canadian mid-market private equity firm with a 26-year history of driving growth in portfolio companies and delivering returns to investors. Based in Toronto, Birch Hill currently has over $4 billion in capital under management. Since 1994, Birch Hill has made over 68 investments, with 52 fully-realized. Today, their 16 partner companies collectively represent one of Canada’s largest corporate entities with over $6 billion in total revenue and more than 34,000 employees.
Even though financial details were not made available, we know Birch Hill, based in Toronto, bought HomeQ in 2012 in a deal valued at about C$136 million.
At the time of that deal (2012), Birch Hill put out a press release stating this:
HOMEQ’s wholly owned subsidiary HomEquity Bank is the only national provider of reverse mortgages to homeowners aged 55 and over, Canada’s fastest growing demographic segment. HomEquity Bank originates and administers Canada’s largest portfolio of reverse mortgages under the CHIP Home Income Plan brand. As of September 30, 2012, the mortgage portfolio comprised approximately 9,500 reverse mortgages with an accrued value of $1.3 billion, secured by residential properties across Canada worth approximately $3.5 billion. HomEquity Bank has been the main underwriter of reverse mortgages in Canada since its predecessor, Canadian Home Income Plan, pioneered the concept in 1986.
From the National Post article above, we learn this:
In 2020, HomeEquity reported record originations of $820 million for 2019, up from $309 million five years earlier. The company’s results were in line with a near tripling of reverse mortgages in Canada during that period, reaching $3.92 billion by October 2019, according to figures from the Office of the Superintendent of Financial Institutions.
Ranson said HomeEquity is now “closing in on $1 billion” in originations for 2021.
That's very impressive growth and no doubt, the pandemic helped because most seniors living in a home decided to stay put and tap home equity in the form of a reverse mortgage.
Less retirees selling their home, less inventory (supply of homes) at a time when demand is booming because of record-low rates and the pandemic. It's actually the best time to tap a reverse mortgage for seniors who don't want to sell their house.
Moreover, as Steven Ranson, CEO of HomeEquity Bank states:
A reverse mortgage typically carries a higher rate of annual interest than a traditional mortgage but no payments are made until the homeowner sells the house or dies, in which case the loan must be repaid by their estate. HomeEquity’s current one-year rate is 3.99 per cent, Ranson said.
So, unless there's a housing crash at the time of death and the loan isn't too big, there will still be some equity left over to pay off any outstanding debt and distribute to loved ones.
Ontario Teachers' knows exactly what it's doing buying this asset from Birch Hill, a top Canadian mid-market private equity firm:
Birch Hill is a Canadian mid-market private equity firm with a 26-year history of driving growth in our portfolio companies and delivering returns to our investors. Based in Toronto, we currently have over $4 billion in capital under management. Since 1994, we have made over 68 investments, with 52 fully-realized. Today, our 16 partner companies collectively represent one of Canada’s largest corporate entities with over $6 billion in total revenue and more than 34,000 employees.
Since our first fund launched in 1994, Birch Hill has been committed to driving growth in our investments and portfolio companies. Our 26-year track record of growth and returns is evidence that our long-term focus works, with 52 fully-realized investments since the Firm’s inception.
We partner with growth-oriented companies in Canada and the United States to build leading global businesses across a diverse set of industries. We are focused on the mid-market, working with companies valued between $30 million and $600 million.
Since 1994, Birch Hill has achieved a 17% cumulative average rate of EBITDA growth on actively employed capital.
At the beginning of 2020, Birch Hill closed its sixth private equity fund, Birch Hill Equity Partners VI, LP. This fund was capped at $1.75 billion, exceeding its original target of $1.3 billion following strong interest from both existing and new investors.
I don't know this fund at all but from what I read on its website, I'd invest with them in a flash second. Their seasoned team obviously has strong expertise in the mid-market space and they know how to add value to their partner companies over the long run.
Now it's Ontario Teachers' and its excellent financial platform which will take over to grow HomeEquity’s operations in Canada and possibly elsewhere (doubt it because of regulatory hurdles but you never know).
There's a thematic play here which Barbara Shecter caught in her excellent article:
Teachers’ interests in the financial services sector include stakes in Canada Guaranty Mortgage Insurance Company, Allworth Financial, Fairstone Financial, and RATESDOTCA. The pension fund, which had net assets of $227.7 billion at the end of June, is also seeking to capitalize on aging populations through investments in life insurance companies including Constellation Insurance Holdings in the United States and Greenstone in Australia.
You'll recall, last week I discussed why OTPP is joining CDPQ to acquire a 33.4% interest in Greenstone, one of Australia and New Zealand’s leading insurance distributors.
In 2019, the two pension managers also worked together to partner up with industry veteran Anurag Chandra to launch Constellation Insurance Holdings.
In March of this year, CDPQ and OTPP put out a press release stating Constellation Insurance Holdings announces it has entered into an agreement to acquire Ohio National. I wrote about it here.
In all these deals, there's a underlying thematic reason as to why they are acquiring stakes in insurance companies, be it as a hedge against rising rates or seeking to capitalize on aging populations through investments in life insurance companies.
Lastly, while I am discussing OTPP, last week, Nia Williams and Maiya Keidan of Reuters reported that Canada's third-largest pension fund beefs ups plan to cut carbon emissions:
Ontario Teachers' Pension Plan Board (OTPP), Canada's third-largest pension fund, announced on Thursday new interim targets to cut the carbon emissions intensity of its portfolio as part of a plan to reach net-zero emissions by 2050.
OTPP, which manages C$227.7 billion ($180.11 billion) in assets, plans to reduce emissions intensity by 45% by 2025 and 67% by 2030, from 2019 levels.
Fellow pension fund Caisse de dépôt et placement du Québec also has a net-zero target by 2050, but environmental campaigners said OTPP's interim targets are the strongest climate commitment yet from a Canadian pension fund.
Ziad Hindo, OTPP's chief investment officer, said the fund would be looking to invest more in clean-energy companies, as well as firms offering software and services that allow other companies to transition to a lower carbon economy.
"Climate change permeates the entire investing landscape. Tackling it requires substantial effort and massive amounts of capital," said Hindo. He compared the climate sector today with the technology sector in the 1990s, and predicted it would cause huge disruption across every industry.
OTPP is increasing staffing across various asset classes to keep up with growing investment in the climate sector, Hindo added. The fund's portfolio currently includes more than C$30 billion in green investments such as renewable energy, energy storage, electrification, electricity transmission, energy efficiency and green real estate.
Unlike some large pension funds in the United States, OTPP is not divesting from oil and gas altogether, although it stopped actively investing in listed exploration and production companies in 2019.
"OTPP will need to go further if it wants to be considered a global leader on climate," said Adam Scott, director of pension activist group Shift. "While this announcement describes how the OTPP will invest in solutions to the climate crisis, it makes no mention of how it will eliminate its exposure to the causes of it, namely high-risk fossil fuels."
OTPP put out this press release on its ambitious interim net-zero targets:
Ontario Teachers’ Pension Plan Board (Ontario Teachers’) today announced 2025 and 2030 interim targets to dramatically reduce greenhouse gas emissions as part of its journey to achieve net zero on its investment activities by 2050.
Ontario Teachers’ has set industry-leading targets to reduce portfolio carbon emissions intensity by 45% by 2025 and two-thirds (67%) by 2030, compared to its 2019 baseline. These emission reduction targets cover all the Fund’s real assets, private natural resources, equity and corporate credit holdings across public and private markets, including external managers.
“As an active, global investor, we play a critical role in helping accelerate the transition to a net-zero economy,” said Jo Taylor, President and CEO. “Given the scale and complexity of our investment portfolio, we believe this is an ambitious plan that will meaningfully lower emissions and contribute to the plan’s long-term sustainability.”
Ontario Teachers’ net-zero plan aims to actively reduce its portfolio carbon emissions, while concurrently contributing to building the net-zero economy. Key points include:
- Significantly growing investments in companies that generate clean energy, reduce demand for fossil fuels and build a sustainable economy;
- Pivoting asset class strategies increasingly towards green investments;
- Actively investing in transition assets to secure future direct and tangible reductions in carbon emissions;
- Setting portfolio companies on a clear path to implement Paris-aligned net-zero plans and meaningfully reduce emissions;
- Issuing green bonds and investing the proceeds in climate solutions and sustainable companies;
- Advocating for clear climate policies and partnering with other industry leaders to effect global change;
- Reporting annually on progress against the 2025, 2030 and 2050 targets.
“Climate change permeates the entire investing landscape. Tackling it requires substantial effort and massive amounts of capital,” said Ziad Hindo, Chief Investment Officer. “By significantly growing our portfolio of green investments and working collaboratively with our portfolio companies to transform their businesses, we can make a positive impact by encouraging an inclusive transition that benefits our people, communities and portfolio companies.”
Ontario Teachers' has focused on climate change for over a decade. It has developed substantial climate-related expertise, invested significantly in climate-friendly opportunities and worked to make portfolio companies greener and more resilient. As at June 30, its portfolio includes more than C$30 billion in green investments such as renewable energy, energy storage, electrification, electricity transmission, energy efficiency and green real estate. In 2021, it has committed over C$5 billion to climate and transition solutions to date.
More details on the Ontario Teachers’ climate journey and progress will be available in the upcoming 2020/21 Responsible Investing Report.
I'm glad OTPP has set these ambitious interim net-zero targets which are more in line with what their peers are doing in Canada.
Earlier this week, Mark Carney, the former central banker who now heads impact investing at Brookfield Asset Management Inc., said he expects listed companies to embrace net-zero carbon emissions plans in the coming years:
“I would say with a pretty high degree of confidence that in the next three years a net zero commitment and a plan to achieve it will be the norm for public companies,” Carney, the former Bank of England governor, said during Brookfield’s investor day on Tuesday.
Financial firms that manage portfolios worth $88 trillion have already committed to that goal as of July, an 18-fold increase over the last 18 months, Carney said. “We will get this to a $100 trillion and counting,” he said, adding that “a third to 40 per cent” of all global financial assets will be linked to a net-zero objective.
Canadians have to follow the Great One's advice and skate where the puck is headed.
Below, Steve Ranson, president and CEO of HomeEquity Bank, joins BNN Bloomberg to discuss the Ontario Teachers' Pension Plan Board decision to buy the partner company of HomeEquity Bank. He notes the parties were talks for two years prior to closing the deal and believes the OTPP will continue to grow the company (click here if it doesn't load below).
In June, Mr. Ranson joined BNN Bloomberg to discuss the current demand in reverse mortgages. At the time, HomeEquity Bank's reverse mortgage portfolio has surpassed $5B in valuation (click here if it doesn't load below).
Lastly, ahead of Glasgow, the COP26 Presidency, Mark Carney joined other leaders to speak at Climate Week New York to discuss the race to zero and delivering on the promise of Paris. See the details here and you can fast forward to minute 50 in the clip below to view his remarks.
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