Michael Graham, OMERS’ new global head of private equity, is planning to reinforce the pension fund’s pioneering direct investment strategy, increasingly with an eye for bargains in a market down-cycle.
“OMERS has over 14 years created an internal team that operates like a general partner team, making long-term direct buyouts in sectors we’re good at,” Graham told Buyouts. “It remains a strategy we like and will continue to roll out and build on.”
Graham, who in April took the reins of OMERS Private Equity from Mark Redman, said a near-term priority will be safeguarding the portfolio as “we navigate the uncertainty of the covid-19 pandemic.” The focus will be “on supporting our companies and ensuring they are well-positioned to weather the storm.”
Graham also sees abundant deal potential in a global economy battered by the health crisis: “Values have recently been tough to find. As the market gets choppier, we see lots of opportunities for buying great companies at better prices.” OMERS, he added, “has the capital to deploy to these.”
OMERS cut its teeth with direct investing, Graham noted, in the last downturn.
After a decade of gearing its PE strategy to funds, OMERS in 2006 took the unprecedented step of doing a solo deal, targeting CCNMatthews, a news distributor later renamed Marketwired.
More deals followed with the financial crisis, forming the nucleus of a direct buyout platform. Over 2007-09, OMERS acquired businesses like baked foods maker Give & Go, golf retailer Golf Town, lab services provider Maxxam Analytics and railway products supplier Nordco.
OMERS also began assembling a direct investment team and locating it globally. Graham, then a senior managing director, played an essential role in this effort, opening the New York office in 2009 and taking charge of a fast-growing North American operation.
Graham said the first run of solo investments met with “early success,” performing better than fund investments during the Great Recession. This confirmed an emerging OMERS view that stronger PE returns could be earned by allocating more capital to directs.
Along with improved returns, OMERS saw the direct platform as a way of gaining “control over our money and over our companies,” Graham said. The strategy also aligned with a longer-term perspective on asset-holding, relative to other PE firms, and an ability to “ride out the storm” when times are tough.
As direct investing accelerated, OMERS found itself bidding against fund partners. This complex situation, Graham said, suggested the need “to go in one direction or another.”
OMERS decided to make a complete shift and focus exclusively on directs, gradually shedding fund and co-investment assets, sometimes through major secondaries transactions. The fund portfolio, which at its height had assets totaling $4.5 billion, was fully wound down two years ago.
In addition, OMERS honed its PE investment criteria. Today, an emphasis is placed on making control-stake investments of $300 million to $1 billion in North American and European businesses with EBITDA of up to $150 million. Preference is given to opportunities with EBITDA of $50 million to $70 million.
In 2014, OMERS also moved from being a generalist investor to a specialist, focusing on sectors where it “made money historically,” Graham said. The team, supported by a network of CEOs, was organized to source deal flow primarily in business services, healthcare, industrials and software.
Graham said domain capabilities, coupled with a long horizon, have been key to differentiating OMERS among investors and giving it an edge with the owner-operators of companies. “If you’re dabbling in sectors,” he said, “you can’t add much value and don’t have the right to own the asset.”
OMERS mostly sources opportunities through networks, well in advance of them coming to market. “We like to have an exclusive window on a deal,” Graham said. “If not, we tend not to do it.”
When both buying and selling businesses, OMERS often partners with other PE firms. An example of this is seen in last year’s sale of a majority interest in Caliber Collision, an auto repair chain, to Hellman & Friedman with OMERS retaining minority exposure.
‘It has worked for us’
OMERS has backed 30 businesses since the first solo investment in 2006. The most recent addition is Community Vet Partners, a network of animal hospitals acquired earlier this year from Cortec Group for about $600 million, according to sister publication PE Hub. The deal grew the portfolio to 16 companies in all.
The 14-year direct investment strategy, which remains unique in the global institutional community, has been consistently supported by OMERS’ board, Graham said, because “it has worked for us.”
Over the past decade, the direct buyout platform realized a net IRR ranging from 14 percent to 18 percent, a person familiar with the matter told Buyouts. Graham declined to comment.
Performance was boosted in the past three years, Graham said, when OMERS was a “net seller.”
Exits in this period included Civica, a public sector software provider sold to Partners Group; Husky, an injection molding equipment maker sold to Platinum Equity; and V.Group, a maritime service business sold to Advent International.
These and other full and partial realizations generated a net IRR for the direct platform of 18.2 percent in 2017 and 15.7 percent in 2018.
In years when there are no liquidity events, returns have fallen below the long-term average. This was the case in 2019, when the net return for the overall PE portfolio, including the investments of OMERS Growth Equity and OMERS Ventures, was 4.6 percent.
Graham declined to share details of OMERS’ incentive system. Compensation, he said, is geared to “success and performance” but is perhaps not as rich as other PE firms. Pay is augmented, however, by the pension fund’s culture, which Graham described as creative and lacking “sharp elbows.” These qualities, he said, have “gone a long way with recruits.”
Setting up shop in Asia
Graham heads a team of 50-plus investment professionals operating from London, New York, Singapore and Toronto. The Singapore office, opened in 2018, helps diversify the strategy, expanding access to opportunities in the Asia-Pacific region.
OMERS is taking a cautious approach in Asia, Graham said, “growing our presence prudently and over time.” Initial activity, which includes committing capital to regional funds and making select co-investments, may eventually lead to solo deals. Last year, Jeff French, formerly with Blackstone Group, was hired as a Singapore-based director.
Graham joined OMERS Private Equity in 2003 from Working Ventures Canadian Fund. He began his career at HSBC, working as a corporate banker.
The direct investment team includes 15 managing directors, among them head of Europe Jonathan Mussellwhite and head of Toronto Tim Patterson.
OMERS invests on behalf of Ontario municipal employees, overseeing net assets of C$109 billion ($77 billion; €70 billion) as of the the end of December. The PE portfolio’s net assets, which include the assets of OMERS Growth Equity and OMERS Ventures, total C$15.7 billion.
This interview was featured in the May issue of Buyouts. Extracts were published online in April.