OMERS Private Equity shifts strategy to directs

Funds with a European focus in which OMERS Private Equity is currently invested include Apax Partners Ltd, Celtic House Venture Partners, Charterhouse Capital Partners, Exponent Private Equity, KKR, Terra Firma, Tower Brook Capital Partners and TPG.

OMERS Private Equity has been making private equity investments for OMERS since 1987 and currently manages C$4bn of investments globally. The fund has a current target allocation of 10% but has the ability to go as high as 12.5%. Today, actual allocation stands at just over 8%. The current portfolio comprises around 65% fund commitments and 35% in directs. Eventually it is anticipated direct investments will represent up to 80% of the portfolio.

Paul Renaud, president and CEO of OMERS Private Equity who joined the private equity business in May 2006 following on from his role as senior vice president of finance and administration and chief financial officer for OMERS said of the decision: “At OMERS Private Equity we fundamentally believe active management adds value over passive management and we have the scale and skills to make private equity investments directly rather than through a private equity fund. By doing this we reduce our costs (ie. no management fees and carried interest) and we control our investment decisions (both acquisitions and divestitures). Also, unlike private equity funds, we have the ability to hold an investment for an indefinite period of time.”

The business has recently revamped its website to reflect its increased focus on direct deals rather than fund commitments. Historically, the majority of investments made by OMERS Private Equity were as a limited partner in a private equity fund. OMERS Private Equity’s investment strategy will now focus primarily on active direct investing whereby the business will hold a majority interest in investments and as such will influence the management of the investment.

What the team focuses on will partly depend on geography and market segment. OMERS Private Equity direct investment focus is mid-market buyouts in Canada, the US and Western Europe (bias to the UK). The team is looking to invest between C$100m and C$500m in each deal. For direct investments, the key criteria are as follows: businesses with talented and proven management teams, with strong and defensible market positions and with products and/or services that have a well defined strategy for either organic and/or acquired growth.

For the time being, the team will continue to do fund commitments where market exposure is desired, but where OMERS has no ability to do directs. On the funds side, any commitments should assist the business to drive its direct strategy through active co-investments and the fund itself must have a proven track record, a strong investment team that is also financially committed and like-minded when it comes to investment philosophy.

Such a shift in focus on directs might suggest future plans for a captive GP fund to be raised. Renaud says a captive fund is a possibility, but not for the short term. And when asked about the future of the fund commitments in the portfolio Renaud stressed the business does not have to sell any of the funds in its portfolio immediately as the business has sufficient resources to meet any capital calls. That said, with the change in investment strategy, if the right opportunity presents itself he said the team would consider selling certain fund commitments.

It appears the Canadian pension funds are at the forefront of this shift in investment focus. OMERS Private Equity is going down a similar route to Canadian institutional investment fund manager Alberta Investment Management Co, as reported in the August edition of Thomson Reuters Buyouts. Like Renaud, CEO Leo de Bever is also in the process of remodelling the management company’s private equity programme to concentrate on direct investments and co-investments and is moving away from fund commitments. Currently 70% of the value of the C$1.4bn private equity portfolio belongs to funds and the balance to direct investments. De Bever hopes to reverse this. Ontario Teachers Pension Plan has also demonstrated an increased commitment to directs with the opening of a London office 18 months ago to focus on European direct deals.