Friday Letter: Pay to play

A North American private equity deal was revealed yesterday that involves that rarest of creatures – a pension fund investing directly in a deal. Not surprisingly, the deal in question is taking place in Canada, home to two big pension-affiliated, direct-investment programmes.  

While US public pensions pay chintzy salaries to investment staff and lavish fees to external managers, OMERS and Ontario Teachers are major players in the market with well compensated, internal staff.

According to reports, the Ontario Municipal Employees Retirement Board will acquire the diagnostics division of life sciences company MDS for C$900 million (US$810 million; €636 million). The deal is being done through Borealis Infrastructure, which invests OMERS capital in infrastructure deals. The firm is affiliated with OMERS Capital Partners and Oxford Properties, which invest OMERS money in private equity and real estate deals, respectively.

The OMERS private equity programme is overshadowed by the larger Ontario Teachers’ Pension Plan, which, through its Teachers’ Private Capital division, is a major participant in North American buyouts, including two big deals with KKR – the acquisitions of Shoppers Drug Mart and Yellow Pages Group.

The investment professionals at Borealis, OMERS Capital Partners and Teachers’ Private Capital are paid more like Wall Street pros and less like civil servants, a political leap that US pensions have been unable to make.

In fairness, however, OMERS has an interesting history that illustrates what can happen when you try to keep skilled investors in-house without paying market compensation. Borealis was formed as a private firm in 2001 originally as a way for OMERS to retain the services of its investment staff. The pension agreed to have Borealis manage a good portion of its private assets, and at the same time several investment professionals from OMERS defected to join Borealis. But two years later, OMERS’ incoming chief executive Paul Haggis brought Borealis back under the pension’s umbrella, providing a quick, 2.5-times windfall for the founders of the investment firm, bemusing the newspaper-reading public, and leading to at least one lawsuit brought by pensioners who claim OMERS wasted money by spinning off a unit and then buying it back at a premium.

In a 2004 interview with Private Equity International, then-OMERS Capital chief executive Ian Collier said: “If you want to be the best-in-class, you need to hire best-in-class people. It took a while for OMERS to realize that.”

Having well paid investment staff on the public payroll has not been easy, politically speaking – last year, for example, a national newspaper ran a story detailing the annual compensation of the heads of OMERS’ three alternative investment divisions, including Collier’s of $346,154 and a $400,000 bonus.

Collier subsequently left OMERS to become the head of a private, private equity fund called Perseis Private Equity, taking with him two OMERS private equity investment professionals. Apparently, the Canadian pension pays well, but not that well. The overseers of OMERS had better take note, or the team that led the MDS deal will be tempted to take their track record elsewhere.