After a challenging 2020, OMERS Private Equity returned to growth mode this year, working a post-covid deal pipeline “as full as it ever has been,” global head Michael Graham told Buyouts.
OMERS’ PE group, an institutional pioneer of direct investing, had an especially busy first half, accounting for three new platform deals, scores of add-ons and two exits. The latter included the sale of UK sustainability consultancy ERM to KKR, reportedly for $2.85 billion.
Investing to date this year, totaling C$1.6 billion ($1.3 billion), represents “slightly above average” activity for OMERS, Graham said. The “velocity of deals,” however, amounts to “one of our biggest years yet.”
OMERS, which targets buyout dealflow in business services, healthcare, industrials and software, had some of its opportunities in view for a while. Thanks to the more promising conditions of the post-pandemic recovery, Graham said, several “came to market.”
“We try to be smart about how we use our time picking assets we’ve had our eye on, that we feel we have the right to own,” Graham said. “We’re not just showing up at auctions.”
Gastro Health checks a number of boxes for OMERS’ PE strategy. For one, it resides in a resilient, non-cyclical sector that has long been a specialty. In addition, Gastro Health’s preventive care focus received a lift during the health crisis that should power expansion in the years ahead. “We want to get behind that macro trend,” Graham said.
Another example is TurnPoint Services, a US HVAC, plumbing and electrical services provider, acquired from Trivest Partners. Graham describes TurnPoint as one of those businesses that is seeing “dramatic pickup” in part because it is in an industry that was held back by the health crisis. Since OMERS’ purchase, it has “doubled in size,” he said.
Once OMERS has gained ownership of assets like Gastro Health and TurnPoint, the goal is to “drive hard,” Graham said. “We take companies with EBITDA of $30 million to $70 million and grow them into companies with EBITDA of $100 million to $200 million.”
Also contributing to this year’s transaction count is OMERS Growth Equity. Launched in 2019 by former CPP Investments executive Mark Shulgan to acquire minority stakes in mid-stage technology opportunities, it has so far invested about C$800 million in 14 businesses. More than half of these deals were closed in 2021.
Backing companies like Canadian legaltech platform Clio and US digital insurer Ladder, the growth equity group is “picking up some great assets,” Graham said. This is important to the entire OMERS organization, which “wants more exposure to tech.”
Push into Asia
Up until recently, OMERS Private Equity has mostly sourced sector-oriented buyout dealflow in North America and Europe. As part of its post-covid surge, it is also seizing on more opportunities in the Asia-Pacific.
OMERS has a “crawl, walk, run” approach to activity in Asia, Graham said, that began with opening a Singapore office in 2018 and has since involved C$1.5 billion of commitments to a handful of funds. By partnering with local PE firms, it can gradually work up to making direct investments.
A key step in this direction was taken this year, when OMERS co-invested alongside FountainVest Partners in the acquisition of Chinese logistics provider CJ Rokin. The deal, reportedly valued at about $1.1 billion, “allowed us to get our feet wet,” Graham said.
While OMERS is still learning the dynamics of Asian PE, such as a preference for minority investing over buyouts, the region’s economic profile is too compelling to ignore, Graham said. “Asia has some of the best growth rates – if not the best – in the world.”
Because of this, OMERS expects to deploy more than C$2 billion to Asia over the next five years, Graham said. Targeting especially attractive areas, such as Australia, China, India and Southeast Asia, the PE group will make more co-investments and, perhaps, do a debut solo deal.
OMERS’ PE investments underperformed in 2020’s virus-roiled market, earning a one-year negative net return of 8.4 percent. This owed to the effect of lockdowns on consumer-facing portfolio companies, such as European cinema operator Vue Entertainment.
The ramp-up of investing this year was accompanied by a return to double-digit performance. The PE portfolio generated a 15.8 percent net return for the six months ending on June 30, OMERS reported, fueled by better-performing assets and exits like ERM.
OMERS’ buyout strategy was in this period showing an almost 19 percent net return, sources told Buyouts, and may finish the year with something like a mid-20s return. Graham declined to comment, saying only that 2021 should be “a very strong year in returns.”
This expectation, Graham said, is linked to today’s robust buying-and-selling environment. In the event of market uncertainty down the line, he said, OMERS will be able to navigate because of its focus on essential services, which “is where you want to put your money.”
OMERS Private Equity recently lost several employees, including senior managing director and head of healthcare Tim Patterson, who left in January. Patterson subsequently launched a lawsuit, claiming he was terminated “without just cause.” The litigation took aim at compensation practices, asserting they were behind many of the departures.
While declining to comment on the suit, Graham acknowledged the “more than average turnover.” OMERS, on the other hand, will have “no trouble hiring” to fill the positions, he said.
In fact, OMERS’ buyout team has already this year brought on 15 professionals at senior- and mid-levels. They include Tyler Craig, recruited in September from BMO Capital Markets for the newly created role of director, debt capital markets. These hires, Graham said, will be followed later in 2021 by a series of promotions.
As some positions will remain open, OMERS plans to continue hiring, Graham said. Until this happens, the PE group will be “running lean.”
Graham was last year named global head of private equity by OMERS, a C$114 billion pension plan. Combined PE net assets, which include the assets of OMERS Growth Equity and OMERS Ventures, total about C$18.2 billion.