How OMERS CIO Ralph Berg Refocused The Investment Programs
Only two years into the top investment job at OMERS, Ralph Berg has made his mark, dramatically re-engineering the investment programs, adjusting the geographical focus and getting ready to buy as M&A markets open up. Amanda White reports.
Ralph Berg, chief investment officer at OMERS for nearly two years, brings a fresh perspective to pension fund management with a history and work pedigree different to what you might expect from a Canadian fund investment boss. He was born in the United States to German parents and grew up in Argentina, and while he works for a Canadian fund he lives in London. An economist and lawyer by training, he describes himself as “essentially an M&A banker”. And he’s used that vast and varied experience to revamp the C$138.2 billion ($97.2 billion) fund’s approach to investing.
After nearly 20 years in investment banking, at Deutsche Bank and then Credit Suisse, in 2013 he moved to Borealis, OMERS’ infrastructure arm, to run infrastructure globally and then head the capital markets team.
In the relatively short time he has been CIO, Berg has rejigged the operating model from a “loose federation of very independent platforms” to a consolidated group of six programs.
“There were loosely defined mandates and guidelines for risk and asset classes which caused duplications and triplications,” Berg says of the investment operating model in an interview with Top1000funds.com.
“As CIO if I wanted to take the balance sheet to a desired state – for example 25 per cent in equities – I needed to flick 17 switches across global equities, quant strategies, Asian equities, multi asset; I had credit in seven different programs. There was no total portfolio view or management team… and we had an excessive number of programs.”
Berg’s stamp
Now the separate programs have been consolidated into six streams; three public and three in private investments.
OMERS created a single equities program of managed from New York, with the research and portfolio management in separate functions.
There is also now only one global credit group which manages any style of credit including investment grade, leveraged finance, high yield, private credit, external private credit and structured credit. The majority of the 27-people team are in Toronto but there are also people on the ground in NYC and Singapore.
The third public investments group is the global multi asset strategies group whose activities include an absolute return quant approach which runs very efficiently.
“It is efficient as a vehicle and very swift,” Berg says. “If I want to make big sudden changes in the balance sheet that’s the place.”
Under Berg a new total portfolio management unit has been formed, which includes the trading team and a newly created capital allocation team, that advises Berg on the best asset mix to achieve the desired returns.
That team also includes portfolio analytics (that explores for example the role technology, AI and data can play) and a strategy team to support the total portfolio management team and the CIO’s office.
The dominance of unlisted assets
OMERS is a very mature fund, crossing the Rubicon of paying more than it receives about three years ago. This naturally means the investment team needs to be especially careful with cash.
“We have to live off the capital base of what we have, and protect what we have,” Berg says.
It’s somewhat of an anomaly that a fund which has liabilities greater than its assets, putting liquidity risk front and centre, would have so much invested in unlisted assets. Now about 55 per cent of the fund is invested in infrastructure, real estate and private equity (PE), and a very strong and long heritage in infrastructure and real estate underpins the fund.
“We have one of the top 10 players in infra globally, I would argue we have the best of the directs in infrastructure, with the very big advantage of being early in that space,” Berg says.
The fund has been invested in infrastructure for 18 years. What started small as a sandbox experimental exercise, turned into a symbiotic relationship between the fund and the social infrastructure needs of the municipalities of its membership. OMERS would build the hospital and then lease it back to the municipality agreeing to a fixed payment.
“This would deliver a very high-quality asset with low risk and volatility, and this became the early model of Borealis,” Berg says. “It was a naturally-aligned client.”
That model continued to thrive and then in 2003 OMERS made its first large scale infrastructure investment, allocating C$1 billion in a power plant in Ontario buying it from British Energy, a forced seller.
“That was the step where we stopped doing [small deals] and moved to very large infrastructure projects,” he says. “Because of the scale it is much more efficient to manage those assets, so the implications for the portfolio was very positive.”
A gas network in the UK became its first international investment in 2003 and expansion followed with offices in London, New York and Sydney. Today it owns 33 infrastructure assets with C$36 billion in AUM, or 23 per cent of the total fund. Each asset is about C$1 billion so the investments are larger and more efficient, with no individual market more than 35 per cent of the infrastructure portfolio.
Oxford Properties is the OMERS real estate business with more than 15 years of investment experience and a focus on Canada, US, UK, Australia, France and Germany.
“That’s been a very stable and very successful business for us with a strong component of cash generation which is a natural fit for the pension plan,” he says. “The fundamentals we like in real estate and infrastructure are the long-term nature – predictable returns, low risk, and the return that comes in the form of cash.”
Private equity is the final piece of the puzzle with investments dominated by the buyout program. In September last year, after analysing performance and deal flow, Berg decided to switch to fund investing in Asia and Europe and to focus on buyouts in North America.
“I came to the view based on data and performance we don’t have the scale to afford the quality origination and asset management required to efficiently do control deals in Asia or Europe,” he says. “We decided to focus on our buyout efforts in North America.” That group employs around 65 people across New York and Toronto.
The fund also recently formed a new external funds management group within private equity, called private capital headed by Michael Block. This is where the historical group of OMERS Ventures, which had some success in financing pharma in particular, and a legacy portfolio in green tech, will now be housed. Through this new group it will continue to invest in life sciences and venture capital and invest with external partners in funds and co-invest.
Future opportunities
While the fund is heavily invested in private markets, a one balance sheet approach which focuses on three things: returns (performance), risk (volatility), and liquidity is front and centre for Berg.
He meets regularly with a group made up of the six business heads plus the head of risk and head of total portfolio management to focus on funding, capital allocation and risk.
For many years the returns from the fund’s unlisted assets provided a predictable cash return to derisk the public markets. OMERS, like many, has taken a hit with the repricing of assets but Berg believes the “lion’s share of the adjustment has taken place”.
“We are starting to see green shoots in the M&A market, investor interest in auctions, and bids at fuller multiples,” he says.
“Financial markets and the banking system is in great health and the lending market remains extremely supportive. One area we have been successful in the last 18 months is in refinancing debt in investee entities in PE and infra, which allows very immediate value creation. The credit market has not seen a lot of primary supply, and we have not seen a lot of deals. We are starting to see LBO [leveraged buyout] activity pick up again. I think we have gone through the worst. Could I say the adjustment is completed, no, because the last mile in the fight towards reducing inflation is always the hardest one.”
While in recent history central banks have been synchronised, now different growth and jobs levels in different countries means a different approach to interest rates, with US the standout, Berg says.
“It is our expectation the US will go from strength to strength in the near to medium term while Europe, Canada and the UK will lag,” he says.
The portfolio has been adjusted geographically to reflect those views with the US about 53 per cent of the portfolio, followed by Canada (19 per cent), Europe (17 per cent), Australia, Asia and the rest of the world (11 per cent).
“Asia and Australia are at the lowest levels. We think there will be great opportunities to add again in Asia and Europe and we are ready for that. There is no doubt in the next couple of years as M&A markets open up it will be a buyer’s market.”
This is an in-depth interview where OMERS CIO Ralph Berg gives insights into the portfolio and how he refocused the investment programs over the last two years across public and private markets to focus on returns (performance), risk (volatility) and liquidity.
He consolidated everything into six different programs to have a better total portfolio overview.
As he explains above:
“As CIO if I wanted to take the balance sheet to a desired state – for example 25 per cent in equities – I needed to flick 17 switches across global equities, quant strategies, Asian equities, multi asset; I had credit in seven different programs. There was no total portfolio view or management team… and we had an excessive number of programs.”
My understanding of this is in order to be more agile and nimble, they needed this consolidation to take place to be able to move quicker tactically in public markets.
Scott McIntosh is Executive Vice President & Head of Global Multi-Asset Strategies at OMERS Capital Markets and has overall accountability for the Global Multi-Asset business, including the Quant Strategies Group, Event-Driven and Macro, Rates and FX teams. He also leads Balance Sheet Management.
And Kenton Bradbury is Executive Vice-President and Head of Total Portfolio
Management at OMERS. His responsibilities include trading, portfolio
analytics and determining the appropriate capital allocation and
portfolio construction for the OMERS investment portfolio.
They both report to Ralph Berg and help him manage allocations across public and private markets (see investment leadership team here).
In private markets, infrastructure and real estate remain the source of safe, predictable cash flows and private equity remains an important asset class but the focus there will be primarily on North American buyouts and they moved away from direct PE in Europe and Asia where they don't have a competitive edge.
As Ralph explains:
“I came to the view based on data and performance we don’t have the scale to afford the quality origination and asset management required to efficiently do control deals in Asia or Europe,” he says. “We decided to focus on our buyout efforts in North America.” That group employs around 65 people across New York and Toronto.
Eric Haley is the Head of Private Equity, Buyout and he's based in New York. Michael Block is the Head of Private Capital at OMERS where he leads a global team of investors across a diverse set of private investment strategies (his team focuses more on private equity/ venture fund investments and relationships).
It's quite a global operation with teams in London, New York and Toronto but Ralph Berg oversees them and he has extensive experience having headed up capital markets and OMERS Infrastructure previously.
Someone told me that Ralph Berg is the highest paid CIO at the Maple Eight and that may be true but it's commensurate with the responsibilities he has managing public and private market allocations and he’s been at the organization a long time (that too factors into compensation).
Anyway, good and rare interview with Ralph Berg who I hope I can talk to one day to delve deeper into their strategies and approach across public and private markets (I have a bunch of questions, used to grill top hedge fund managers across the world so I'm always asking questions).
In other related news, Bloomberg recently reported that OMERS wrote down its $325 million investment in Northvolt.
I covered Northvolt's collapse and Canadian pension fund exposure back in November of last year here so I will keep my comments brief.
A lot of smart funds got hit when Northvolt went under, and as OMERS CEO Blake Hutcheson explained to me last week when we went over 2024 results, in a large portfolio you'll always have some problems which is why diversification is so important.
I get these anonymous emails from people telling me IMCO lost $400 on Northvolt and promoted that team but I do not know all the facts there.
The only thing I will state is as these large pension funds get larger and write bigger and bigger tickets, do not be shocked if there are other big writedowns down the road, it comes with the territory, you take some risk, you will NOT win them all.
The key for all of them is to have a well-diversified portfolio to be able to withstand any major hit from one or two problem investments.
Let me end it there.
Below, Dan Greenhaus, Solus Alternative Asset, joins 'Closing Bell' to discuss Trump's tariffs and the market reaction and uncertainty.
And Mohamed El-Erian, Queens’ College Cambridge president and Bloomberg Opinion columnist, examines the wide-ranging issues impacted by Friday’s Oval Office clash between US President Donald Trump and Ukrainian President Volodymyr Zelenskiy. El-Erian also looks at stagflation concerns and the erosion of US economic exceptionalism. His opinions are his own.
Lastly, the first time, Europe is leading the charge on a Ukraine ceasefire, with the US stepping back after the Trump-Zelensky fallout. Can they succeed? Ian Bremmer explains in Quick Take.
Comments
Post a Comment