An Update on OMERS and AIMCo's Private Equity Programs

Michael Graham, Global Head of OMERS Private Equity posted a message updating members on their activities:

There are many things top of mind as we navigate through what is now a markedly different world than just a few months ago. Global markets (debt and equity) are in flux, with inflation in many countries at record highs and a potential recession causing uncertainty. Debt is more expensive and there are fewer capital sources lending than last with the syndicated loan market largely closed. Overall, these factors are causing (necessary) cooling in the PE industry. There is a growing reluctance by many of our peers to “spend up” or to deploy new capital at all in the last half of 2022. On the positive side, our portfolio continues to perform well, with most companies showing strong growth in 2022. And many PE funds still have high levels of dry powder, but they are cautious on valuations and assets that aren’t traditionally recession resilient and are looking for “super quality” companies to acquire. We like this turmoil and see it as a buying opportunity – for new platforms and for add-ons to the portfolio. We continue to explore investments in recession resilient industries, [see our robust list of deals closed below], as we look for quality long-term investments (as always!) on behalf of our pensioners.

So far this year, we have completed seven new investments, and plan to continue to deploy capital. We began our direct investing program during the time of the 2008 financial crisis and are well-positioned to invest in any market. In times like these, our position as a long-term investor with access to evergreen capital gives us an advantage over other players in the market. We recently announced three new platform acquisitions including Network Plus and Bionic in the UK, and US-based Pueblo Mechanical Services as well as a minority growth investment in US based NovaSource Power Services. We are excited to partner with their world-class management teams to implement bespoke strategies that drive further growth while preserving the distinctive aspects of their businesses that made them world-class to begin with. You can read more about our recent deal activity here.

One way that we’ve evolved our portfolio support capabilities is through our newly created debt capital markets function run by Managing Director, Tyler Craig. This function speaks to the maturity and growth of the direct investing program at OPE. Tyler and the team have been busy these last few months and you read more about what they’ve been up to here.

While we’ve been busy growing our portfolio, we’ve also been busy growing our team. This year, we’ve added 10 new members to the OPE team in all four of our offices to better support our global transactions and asset management capabilities.

All in all, we are optimistic about the remainder of 2022 and beyond. We have a deep and experienced team, an established, differentiated strategy and I believe this combination of characteristics positions us well to continue delivering results on behalf of our half a million members.

We look forward to continuing our partnership and hope to see you soon.

Mike Graham, Global Head of Private Equity

This is an excellent message from Mike Graham going over developments in the PE industry and activities at OMERS Private Equity

You can also read all the summer updates here, including why Tyler Craig and his team have been very busy over the past few months.

I recently had a discussion with OMERS CEO, Blake Hutcheson and the CFO/ CSO, Jonathan Simmons, going over their mid-year investment update and they shared this on their private equity portfolio:

I asked Blake how they managed to post a 7.7% return in Private Equity during the first six months of the year when their large peers registered marginal losses:

We have approximately 25 businesses we invested in and they (peers) may have a different set. We track our earnings, we track our roll-ups in our businesses, we value them every quarter and vast majority of our businesses are doing really well in the post-COVID environment. 

And we aren’t fund investors like many in the private equity space, we are direct drive investors, we have a real line of sight to real operating companies as opposed to a proxy for the industry

These are real companies that we own or control, with value-add strategies that we have been consistently moving up the EBITDA through roll-ups and acquisitions. Our line of sight is very direct and very real time and that helps explain buoyancy during these times. It's not a proxy for the industry, it’s one by one, enterprises we understand, valued at every quarter. 

He told me they are "very comfortable" with their valuations in the PE portfolio. I must say, OMERS Private Equity is doing very well again this year, so kudos to Michael Graham, Jonathan Mussellwhite and the rest of the senior team and employees there.

In the first article above, Jonathan Simmons, OMERS' CFO and CSO, stated they are seeing about 10%  year-over-year growth in earnings at the companies in their PE portfolio, even before they’ve added to profits by acquiring new businesses (organic growth).

There were also some dispositions that helped drive returns, like the sale of Forefront Dermatology:

In February, we announced our sale of Forefront Dermatology, the largest physician-led single specialty group providing dermatology services in the U.S., to Partners Group and our reinvestment in the company as minority owners. During our ownership, Forefront more than doubled the size of its geographic footprint, practice count and clinician base, and we’re thrilled about what we were able to accomplish in partnership with Scott Bremen, Dr. Betsy Wernli and the rest of the talented team.

OMERS Private Equity began its direct investing program during the time of the 2008 financial crisis and it has grown very nicely since then. OPE now manages 17% of OMERS' total assets (figures below as at end of December and include third party capital) and its operations span across four global offices (London, New York, Toronto and Singapore):

Mike Graham states they like the turmoil in the industry right now and see it as a buying opportunity for new platforms and for add-ons to the portfolio.

They continue to explore investments in recession resilient industries and they recently announced three new platform acquisitions including Network Plus and Bionic in the UK, and US-based Pueblo Mechanical Services as well as a minority growth investment in US based NovaSource Power Services. You can read more about their recent deal activity here.

The solid performance for the first half of the year speaks volumes, OMERS Private Equity is delivering great results during a difficult time on behalf of its half a million members and they remain optimistic for the remainder of 2022 and beyond.

AIMCo's Private Equity Coming Off a Record Year

Next we focus on what AIMCo's Private Equity team has been up to.

In an article this summer, Buyouts Insider had an interview with Peter Teti, AIMCo's Head of Private Equity and International. Part of the article was published on AIMCo's website discussing how the PE team generated a record return in 2021:

Peter Teti, Head of Private Equity and International had the opportunity to speak with Buyouts Insider, a North American private equity magazine. Teti discussed AIMCo’s Private Equity team’s record performance in 2021 and the future ambitions for the program.

AIMCo’s Private Equity team generated a strong performance in 2021. Last year, the team deployed $2.7 billion in the global market, a record amount. AIMCo invested in a series of high-profile deals such as Thoma Bravo’s US$3.2 billion acquisition of cybersecurity platform and Clayton Dubilier & Rice stake sale and single-asset process for vehicle glass repair brand Belron.

In addition to scrupulous investing, AIMCo earned a great private equity return in 2021. In April, it reported generating one-year net IRR of 65.9 percent and a four-year net IRR of 22.3 percent, well above the performance in 2020. This year’s strong success is owed to several factors such as major portfolio exits. For example, the sale of HGGC of insurance services provider Davis, for US$1.7 billion, and the sale alongside OMERS Private Equity of sustainability consultancy ERM for US$2.8 billion. AIMCo, CCMP Capital and MSD Partners were also part of the NYSE debut of pool equipment supplier Hayward. “It was a big win for us,” said Teti.

AIMCo’s private equity strategy has a 60/40 split. 60 percent fund investments and 40 percent direct and co-investments. It focuses on backing large and mid market buyout funds in North America and Europe and co-investing in deals with them and other partners. This year’s portfolio rose to $10 billion-plus. “The first and primary filter is performance across business cycles and over time,” Teti said. “We hyperfocus on that.”

AIMCo’s Private Equity Team had a fantastic performing year, the highlights included AIMCo commitments to Genstar Capitals 10th flagship buyout fund which closed on US$10.2 billion and Summit Partners 11th flagship growth equity fund, closed on US$8.3 billion. In the future AIMCo will deepen its presence in global markets, while reinforcing existing operations in Europe and eventually Asia. As for the Private Equity Team, Teti currently manages about 20 investment professionals in Edmonton, Toronto and London, and is expected to grow with new hires.

AIMCo's Private Equity team delivered a record gain in 2021 (one-year net IRR of 66% and four-year net IRR of 22%), helping AIMCo deliver a record gain of 14.7% to its clients last year. 

Pretty much everything went well for AIMCo's PE team last year, investing with top funds on high profile deals and realizing hefty gains on sales of assets, including the sale alongside OMERS Private Equity of sustainability consultancy ERM for US$2.8 billion.

In another Bloomberg interview in July, AIMCo's PE Head said slow fundraising is giving investors a breather:

Buyout firms facing a slower fundraising environment are giving investors much needed respite, according to the head of private equity for Alberta Investment Management Co.

“We have seen a slowdown in fundraising a little bit and I think a lot of LPs are welcoming a bit of a breather,” said Peter Teti, referring to limited partners. The firm managed C$168.3 billion ($134.6 billion) at the end of 2021.

Rock-bottom interest rates prompted yield-hungry investors to pile into private equity in the last decade and encouraged buyout firms to make deals and set ever-larger fundraising goals. The industry may be facing a reckoning now as rising inflation and soaring rates trigger anxiety about a protracted recession.

Even so, Aimco will continue to commit to some existing fund managers and selectively add new ones, Teti said in an interview. At the same time, he expects a decline in capital deployment and distributions. 

Private equity makes up around 8% of Aimco’s total assets under management. The firm, which invests for pension plans, endowments and government funds in Alberta, plans to increase such holdings in the coming years with the expectation that the asset class will continue to outperform other investments, Teti said.  

‘Critical Lens’

Aimco’s private equity holdings returned 66% in 2021, boosted by unloading some investments during a period of frothy valuations. The asset manager also wagered on technology in the last two years -- one of the worst-hit sectors in the recent market selloff -- investing in software companies including Medallia Inc., RealPage Inc. and Visma AS.  

Public markets “painted certain technology companies” with “one brush,” but Aimco’s investments have strong underlying operating metrics, Teti said. Even so, investors are approaching private equity with more caution, he said.

“I think people want to be mindful of making investments in this environment,” Teti said.

Peter Teti and his leadership team are delivering outstanding results for AIMCo's clients, but he's right to temper their enthusiasm as there has been a decline in distributions and capital deployment.

James Barber, AIMCo's co-CIO, told me back in April not to expect such huge gains this year but that the program is solid as it matures:

"I think what we saw in Private Equity was a function of two things: 1) the program maturing so no more J-curve effects. We are seeing the revaluation of assets which were investments we made years ago. Strong equity markets helped those valuations as strong rising valuations are helpful to that. Secondly, there were situations where we exited as well. ERM would be one example, Hayward would be another one of a successful IPO exit. So, it wasn't just ERM, a couple of situations where we were divesting as well as having assets where we were executing on the underlying thesis and those assets were being revalued. I'm sure you've seen this, equity markets have been robust, in particularly in private equity where there's a lot of capital, so we are seeing multiples expand. But at the same time, there's a lot disruption happening, businesses are being successful at creating revenues, supporting that multiples expansion, so we have been fortunate benefit."

He added: 

"I wouldn't want to extrapolate those returns. We think as the program becomes more diversified across geographies, sectors, strategies and vintage, we will continue to see strong returns but not the outsized returns we saw last year. [As the J-curve effects dissipate] We are now moving more into the sweet spot as the program matures so some of those investments we made years ago are coming into fruition. And the second thing is the program is more focused on mid-market space and from a sector perspective we've focused on technology, healthcare and other areas which have proven to be good places to make investments a few years ago. These businesses have not only taken market share but have benefited from high margins."

Note that AIMCo's PE program is fairly young compared to OMERS and other large Canadian peers but it is obviously on solid footing.

The strategy has a 60/40 split, 60 percent fund investments and 40 percent direct and co-investments. It focuses on backing large and mid market buyout funds in North America and Europe and co-investing in deals with them and other partners:

Our Private Equity Fund strategy invests selectively with the world’s leading private equity firms and builds deep, lasting relationships with our partners. We aim to invest in established large and middle-market buyout funds primarily in North America and Europe. 

Our Directs & Co-Investments strategy focuses on co-control and minority investment positions in private companies, alongside our Private Equity Fund partners and other like-minded institutional investors. We seek to make investments primarily in North America and Europe, and across a broad range of industry sectors including consumer, industrials, business services, financial services, technology and healthcare.

In 2021, the Funds program committed approximately $700 million of new fund investments and delivered a return of 45.3%. The Directs & Co-Investments strategy, representing 42% of the program,  invested approximately $1.1 billion in new co-investments and delivered a return of 100.2%. 

That is the breakdown of how AIMCo's PE program generated such outsized returns last year.

As far as PE performance so far this year, AIMCo provides a quarterly update but this doesn't include private markets so it isn't available. 

I would recommend you read more about AIMCo's PE activities in their 2021 Annual Report (figures I cite above are on page 22).

I also enjoyed reading this investment spotlight on the acquisition of Belron, a vehicle glass repair and replacement business, alongside Clayton, Dubilier & Rice:

Lastly, the updates above should reassure OMERS and AIMCo's members/ clients that their private equity teams are doing outstanding work, delivering solid long-term gains in all market environments.

Their approach and objectives are different but it is worth noting their activities and seeing how they are delivering on their respective mandates.

Below, Dylan Cox, head of private market research at PitchBook, discusses the outlook for private equity and venture capital in 2022.

And BluWave Founder & CEO Sean Mooney joins Jill Malandrino on Nasdaq TradeTalks to discuss why private equity is poised to come out ahead of the economic downturn.