OMERS Aims to Triple Asian Assets Within Eight Years
The Ontario Municipal Employees Retirement System aims to triple its assets in Asia-Pacific over the next eight years from the C$13 billion ($9.5 billion) it’s already deployed in the region, according to its President and Chief Executive Officer Blake Hutcheson.
Speaking at the Milken Institute Asia Summit on Thursday, Hutcheson said the Canadian pension fund was in “full diversification mode.”
“So far we’re very focused on India and Australia in two areas -- infrastructure and real estate -- and basically computer screen investing in the rest of Asia and Southeast Asia from an equities standpoint,” he said.
The Ontario pension, also known as Omers, had C$119.5 billion in assets as of June 30. It posted a 0.4% loss for the first six months of the year partly due to a fall in public stocks.
On Thursday, OMERS CEO Blake Hutcheson took part in a panel discussion at the Milken Institute's Asia Summit on the long and short of patient capital:
Ever-changing short-term market conditions and compounded uncertainty over the long term have required asset owners to deploy increasingly innovative fund-management strategies. Transitory shifts have challenged them to hunt for yield across geographies and asset classes, though in a manner aligned with investment values and fiduciary responsibilities. Given current market conditions, where traditional asset allocation approaches may be obsolete for long-term investors, how are asset owners rethinking asset- allocation and investment strategies? Are there investment areas that may be better adapted to weather global health pandemics, climate change, geopolitical tensions, and other disruptions?
Helen de Mestre
Managing Director, Country Head Australia and New Zealand, Principal Global Investors
President and CEO, OMERS
Ahmad Zulqarnain Onn
President and Group Chief Executive, Permodalan Nasional Berhad (PNB)
Executive Vice President and Global Head, Private Equity, BCI
CEO, Indonesian Investment Authority
Joining Blake on this panel was Jim Pittman, Executive Vice President and Global Head, Private Equity at BCI:
I took the time to listen to the entire discussion here and will provide some notes below, focusing mostly on the Canadian pension investment managers.
I will follow chronological order and focus on more important items.
Jim Pittman, Executive Vice President and Global Head, Private Equity, BCI
First, Jim Pittman presented himself and discussed BCI:
We are a C$210 billion, maybe US$160 billion fund based in the West Coast. We've been around 25+ years. In 2014, our new CEO, Gordon Fyfe, decided we would become a much more active investor of our capital around the world, so we started moving much of our passive capital into active positions. I represent Private Equity, we started back in 2016, at around C$6.5 billion of passive capital. We are now $25 billion in active capital, about 45% of that is directly invested. In terms of patient capital, across the firm, we try to get close to 50-55% of that directly invested in patient capital. Along that journey, we are in the high 40s today. In terms of exposure around the world, we are 45% in North America, 30% in Europe, 15% in Asia and the rest mixed around the rest of the world.
Blake Hutcheson, President and CEO, OMERS
Blake began by discussing the success of Canada's Maple 8, explaining why they're out-punching their weight class in a global context:
Very briefly, our governments made it okay to de-link our platforms from the political process, which allows us to buy real businesses, to pay people competitively to compete with the best of the world. And because we are only 3% of global GDP, by definition we have to get out of Canada and spread our wings and diversify in a global context.
Today, OMERS itself runs C$125 billion, with leverage and other things, we have a little over $300 billion in firepower and clout. We will be C$200 billion in the next five to seven years which we think gives us a C$450 billion global platform. We are 30% in Canada, 40% in the US, 20% and about 10% in APAC, we have about C$13 or C$14 billion in this market. And to be direct about it, we have 20 people now in Australia, we have 50 people here in Singapore, we tend to directly invest in infrastructure and real estate in this region and generally screen securities from an equities standpoint in this region. And because no one ever remembers what you say at these events, only how you make them feel, I will leave you with a comment: we are open for business, we are Canadian so we are nice, our handshake means something, and hoping there are people in this room we can do business with in the next weeks, months and years. We are 62 years old, we are going to be around for another 62 years and we are going to be in this region for multiple decades so nice to see everybody, hope we can do things together.
The discussion then turned to asset allocation in a rising rate, high inflation environment and whether the market has fully digested global tightening.
As Blake mentioned, being Canadian, we have to have the long-term focus. One of the components is we have asset allocation strategies, we update them every year but we realistically update them every three years. When we have big changes in interest rates, etc., we continue to embed that in our program but we are not looking to be reactionary, we are not responding to what is going on in the market, we take a much measured approach. As Blake has mentioned, we actually use leverage inside the pension fund to survive short-term bumps in the road. We try not to be reactionary. We take our time, look at what is going on and pick specific areas where we can invest more capital. As a long-term patient investor, we are not responding quickly to these changes.
Blake was then asked about global growth and more specifically growth in Asia given the rising rate environment.Blake Hutcheson:
Central bankers have one tool and they're used to trying to moderate demand and we all know this inflationary run-up is at least in equal measure a supply issue and they only have one tool. And by definition when supply constraints happen, prices go up, it stultifies growth. And by definition, when central bankers raise rates, while it might bring down inflation, it stultifies growth. There are going to be risks of recession here, there and everywhere. You can either be pessimistic or try to find ways to dance when the rain drops and recognize there are a lot of recession-proof assets: food supply, in our case (Canada), oil & gas, and shelter. We are very focused on recession-proof assets recognizing there is a high probability there will be a recession in most of the markets we invest in.
But I think as Jim said, when you get the allocation right...we only have 25% of our book in (public) equities. We have titled for a long time in privates, so 55-60% of our book is in infrastructure, real estate and private equity. And in a year like this year where most indexes are a little disturbing, we can be in the black in a market like this by having only 25% of our portfolio tilted in (public) equities. We say a quarter in our country is not 3 months, it's 25 years. If traders want to trade one of the stocks they believe in on a short-term basis, they do what they want to do. If we believe in that asset, we are going to see it through the cycle and continue to double down if people are hitting it hard.
So, we just keep remaining long view, optimistic, recognizing -- we are all realists -- there are recessionary trends in the air in virtually every region in the world, in some cases, it's already there but they don't want to call it.
Dr. Ridha Wirakusumah, CEO of Indonesia Investment Authority (INA), then took a more optimistic view of what is going on stating there are going to be plenty of opportunities to invest in infrastructure in the developing world to make this a better world.
"Infrastructure is the single most important multiplier effect on the human development index," he said.
He mentioned they are working (co-investing) with CDPQ, APG, ADIA and GIC. He said they are investing only in Indonesia for now and looking for capital and competency. He mentioned CDPQ is a big investor in solar and they're looking to develop a solar platform with them. He also said they are open to working with other partners, like OMERS, to bring in capital and competency.
I encourage you to read this Reuters article on how Indonesia’s sovereign wealth fund has garnered more than $20 billion of co-investments from funds including Singapore’s GIC and Abu Dhabi Investment Authority, and is actively looking at infrastructure assets:
“The money is there, but to find the right one at the right angle, the right dimension, the right amount of return, it’s not easy,” Indonesia Investment Authority (INA) Chief Executive Officer Ridha Wirakusumah said on the sidelines of the Milken Institute Asia Summit in Singapore on Thursday.
Indonesia’s youthful population, abundant natural resources and its position as the region’s largest economy is attractive to investors but poor infrastructure, red tape and corruption have hindered investments.
INA, Indonesia’s only sovereign fund, was launched in early 2021 with $5 billion from the government.
Unlike many other state wealth funds that manage excess oil revenues or foreign exchange reserves, the INA seeks to attract foreign co-investors to help fund economic development.
Ridha, a former banker, said the state investor had “live deals” in toll roads, airports and sea ports.
He said the fund is also seeking investments in water and logistics sectors, and digital infrastructure industry that includes fiber optics and data centers.
In 2021, INA set up a $3.75 billion toll road fund with Caisse de dépôt et placement du Québec, Dutch APG Asset Management and a unit of the Abu Dhabi Investment Authority .
This year, China’s Silk Road Fund agreed to invest up to 20 billion yuan ($2.78 billion) in INA.
“Indonesia needs infrastructure,” Ridha said. “It’s actually good for not only long term impact from the investments perspective, but also good for the social impact.”
Encik Ahmad Zulqarnain, President & Group Chief Executive of Malaysia’s Permodalan Nasional Berhad (PNB), said the rising rate environment is making bonds attractive again and they are allocating more into real assets to address inflation.
"By stroke of luck, we are under-allocated to these asset classes and have been allocating more to them over the past five years, and it's a great time to do that," he said.
Helen de Mestre, the moderator, then asked Jim Pittman about reasonable return assumptions on the long and short of investing credit and equities.
I spent most of my time in private markets. The viewpoint we have in Private Equity is we've been able to get 20-30% returns over the past 5 years. And you don't get that with low risk, you get that with high risk, a lot of leverage. And so one of the issues we have to look at today, especially when we look at our own teams, oftentimes our team expects that if we got 25% returns in the past, we should be able to get that in the future. That's unlikely to happen. We have to retrain our people, in terms of equities, in an environment where you no longer have quantitative easing, you have quantitative tightening and rising rates, there has to be an impact on exit values and there is also an impact on entry values. Therefore you have to learn how to invest in a new environment and that is an expertise that many of us have to learn.He added:
But one of the things we didn't talk about so far in the panel, and you have to look at from a patient capital perspective, as a pension fund over the past 15 years because of all this QE, we've had an amazing ability to be over-funded. Most of our pensions which we represent are at 105% or 110% in terms of funding, so we can take more of a shock in terms of volatility in terms of what is going on in underlying markets and not have to respond. I think other pensions which are underfunded and less liquid will be much more impacted.
This is a great point, Canada's large pensions are in a great funding position to withstand any shock and over the last few years, they have been lowering their discount rate and building up their reserves for a rainy day.
Blake then discussed OMERS' direct drive capabilities:
Just speaking for us, we've largely been direct drive investors for a long time. When you go to business school what is the first thing they teach you? What am I good at, how do I get in front of trend given limited resources? We have spent the last decade trying to get really great at infrastructure. We have 22% of our book in it. We have 30 world-class assets, the largest nuclear plant in the world in Canada, we've invested in toll roads in India, we've invested n Bangolore Airport, we own the Port of Melbourne with others,Transgrid here. Today, our Oxford Properties platform which we own 100% has about C$75 billion assets under management, I would put it up against the best of the world. We just agreed to do a mixed-use project in Sydney which is over C$1 billion of our capital, etc. And our private equity is largely direct drive. Now, given limited resources, we will support fund type structures where we can't be great. For example, we have backed some significant investors in this market in private equity because we aren't able to compete with the best of the best in this part of the world at this point. And the fees are what they are.
[Talks about how Australian regulators are hampering pensions]
... We just try to do the right thing, deploy our own capital, if we can't be world-class, we will partner with others, and so far so good, we have been outperforming for decades on a relative basis and usually on an absolute basis, often on a relative basis and that's just our strategy.
The discussion then moved to private markets and whether they can still deliver great returns.
Encik Ahmad Zulqarnain discussed getting access to top managers and access to co-investments to reduce fee drag.
Jim Pittman said the "debt markets are frozen" and that is impacting private markets:"Right now, it's a freeze, nobody knows how to actually get distributions, how do you sell something to give back to LPs so you raise more money."
He added: "There is an amazing pause we are seeing over the past 2 months and maybe over next 4 months. We were very slow to get into venture capital and growth ... now we are actually waiting to participate. I think times are getting very interesting and someone who was under-allocated will see more opportunities."
Blake said on the VC side, they have C$2 billion in 180 positions representing 1.5% of the total portfolio, which is measured, and if they get "3 out of 20 right, they can get a 20% return."
He said you don't get those returns in other asset classes so you need to take some risks in this area to hopefully capitalize on new emerging growth companies.
The discussion then moved to ESG and Blake explained how it makes great business sense to adopt the right plan and they led efforts to decarbonize at Oxford a decade ago. “Our customers want it, our stakeholders want it and our people want it. It’s a win, win, win” and they made great returns in the process.
On transition finance, he added: "It's a tremendous opportunity, it’s very real, we have to get it right but we have to get it right as a collective."
Jim said it’s not just the executive team driving this, their clients have been asking for this movement for the past eight years so "it's not a reactionary thing, it's driven by our client base."
In closing comments, Blake said this:
We are in full diversification mode. We have C$13 billion in this region today, we hope to triple it. Business travels at the speed of trust so relationships for us will be critical. And so far we are very focused on India and Australia in infra and real estate and computer screen investing in Southeast Asia and Asia from an equities standpoint. And now that I learned about Indonesia and Malaysia, we better expand our horizons.Please take the time to watch the entire discussion here as I cannot embed it below.
Admittedly, I couldn't transcribe everything in this post (from the second half) but tried to get the most important information here.
I thought all the panelists were excellent and really enjoyed this panel discussion.
Blake and Jim are great guys, glad to see them on a panel together.
Anyway, take the time to watch the entire discussion here, it is excellent.
Update: I was able to embed this discussion below.