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OMERS shoots for 90% direct deals

The fund is willing pay the prevailing high prices to secure the right assets, OMERS PE head of Europe tells PEI.

OMERS PE head of Europe Mark Redman expects 90 percent of the Toronto–based pension fund’s PE investments to be made through direct deals rather than funds, within the next five years.

When Redman joined OMERS PE in 2009, over two thirds of its allocation to private equity came through commitments to funds. Today, Redman said that roughly one third was invested via funds, and two thirds via direct investments – either as the sole investor, or through co-investing with another partner.

He told PEI: “We had been doing direct deals in North America for some time but started the direct strategy in London in 2009. So far we have invested $2 billion [in direct deals] in Europe.”

“When I joined, around 70 percent of the assets were in private equity fund assets but when we tracked the return, these only accounted for around half of the fund’s returns.”

He said as the group developed its direct investing platform, it made sense to diversify away from purely investing in North America, which also helped to drive down costs.

“Now funds account for less than a quarter and it will become around 90 percent in direct deals within five years. It will always make sense to keep some PE exposure in funds if we need a specific geography or sector expertise, but we feel we are the most advanced in terms of this transition.”

Redman believes may LPs will follow suit, but the majority will not go as far as OMERS in terms of direct private equity investments.

He said that the group had been approached to partner in European deals by a mix of sovereign wealth and other pension funds from Canada, as well as Australian, Korean and Japanese LPs over the past two years. Approaches by US and European LPs were virtually non–existent however, he said.

Redman said that in terms of its direct investing strategy, the group was targeting only “top decile assets” – and was prepared to pay the prevailing high prices necessary to secure the right assets.

“We are at the top of the market in terms of pricing and debt multiples. If you aim to invest in top decile assets you should be able to invest across the whole of the cycle.”

He cited OMERS PE’s two direct European investments this year – in UK cinema group Vue, and last month’s acquisition of European environmental consultancy ERM as cases in point.

Both were made alongside fellow Canadian pension fund AIMCO, which was an equal partner with OMERS PE in Vue, and a minority partner with it on the ERM deal.

Redman said: “The last two deals in Europe have been partner deals and we will look to work with AIMCO again, but typically there are two or three others we look to work with and our core business is to be the sole institutional investor.

It aims to make between two and four acquisitions a year, although it made no acquisitions at all in 2014.

“We do get approached to do deals but won’t get involved if it is more than two partners and we don’t want to be involved in club deals. We want to be at least a 50 percent partner.”

Redman said it would take time for many LPs to transition toward a more direct model and that many countries had not had the favourable regulatory backdrop that had aided the direct investing capabilities of many Canadian pension funds.

“Canadian firms have been able to take control of their own destiny by bringing their capabilities in house. They have been incredibly impressive compared to many LPs elsewhere. It is not something that can be done overnight as it is a huge change to transition a passive investment fund to a more direct model.”