Proverbs such as “birds of a feather, flock together” and “great minds think alike” may have resonance in the private equity world, where a variation of the 2-and-20 compensation structure became industry standard across a $2.5 trillion-dollar pool of capital. But do they also apply in the pension fund world? In Toronto, one pension chief executive officer is about to find out.
Michael Nobrega, head of the C$60 billion Ontario Municipal Employees’ Retirement System (OMERS), is launching a global alliance of “like-minded investors” to jointly invest in large-scale infrastructure and real estate assets. Nobrega says these investors “will all have obligations in the future, take a very long-term approach to investments and look to secure long-term cashflows from these assets”.
Dubbed the Global Strategic Investment Alliance, the effort will seek to create a “partnership of four major players to spend over a five-year period roughly $20 billion in acquiring what we call ‘alpha assets’”. These are large-scale, dominant assets with sustainable cash flows in the real estate and infrastructure sectors.
“We have found from empirical evidence that large-scale investments tend to have a higher degree of return than we’ve found with smaller assets in these two asset classes,” Nobrega says. The return spread, he adds, is about 200 basis points annually.
Asked to name an example, he points to OMERS’ 2005 acquisition of Scotia Gas Networks. This was a deal worth nearly $8 billion in which OMERS’ direct infrastructure investment arm, Borealis, put up C$555 million of equity alongside the Ontario Teachers’ Pension Plan for stakes of 25 percent each in the Scottish gas utility, which serves nearly 6 million people.
“Our pursuit of these investments basically has to be done with other partners because they are very large-scale investments, particularly in the infrastructure space,” says Nobrega.
The vision is as follows: OMERS – which has already gained board approval to commit its share of $5 billion to the alliance – will find three other large pensions in Europe, Asia and the US. They will sign a formal agreement to create a “programme co-investment”, whereby they will each commit $1 billion a year for five years to invest in alpha assets. Borealis and Oxford Properties, OMERS’ real estate investment arm, will find deals and present them to the alliance board once OMERS’ board has approved them. The alliance board, comprised of eight members (two from each alliance member), will decide whether to pursue the opportunity.
Alliance members can opt out of deals in order to avoid over-exposure to a certain geography or asset type. “There has to be flexibility within the system because the world is too complex to tie people down. People have conflicts,” says Nobrega.
If one of the members passes on an investment, the other three can choose to pursue it on their own. The member which has opted out would not then be able to band together with someone else to compete for the same deal because “once you pass a deal, you will not be allowed to participate in that deal,” says Nobrega.
He maintains that being an alliance member will be inexpensive. “There will be no negotiation fees, there will be no financing fees, there will be no acquisition fees, there will be no fees on committed capital. All that we will charge the system is a fee structure that will pay Borealis or Oxford – depends if it’s a real estate or infrastructure asset – approximately 50 basis points to manage the assets. And there is no carry either to Borealis or Oxford in the arrangement. That is, in essence, the deal,” Nobrega says.
It remains to be seen whether pensions will buy into the grand scheme. But investors looking for alpha may no longer need to pay 2-and-20 to get it.
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