OMERS seeks $5bn from US pensions

A feeder fund raised by an affiliate of private equity firm Yucaipa will invest in large infrastructure and real estate assets, with OMERS chief executive Michael Nobrega hoping to have US participants identified by the end of the year.

The Yucaipa Grand Fund is now in the market raising a $5 billion feeder fund for US pension plans, which will enable them to participate in a global investment alliance being put together by the Ontario Municipal Employees Retirement System (OMERS).

The firm, an affiliate of Los Angeles-based private equity investment firm Yucaipa Companies, was mandated for the job last year by the C$47 billion (€33.3 billion; $45.1 billion) Canadian pension and formally began meetings with investors earlier this year.

So far, things are very encouraging. Actually, they're very, very encouraging

Michael Nobrega

The marketing effort is the latest move in OMERS’ goal of creating a Global Strategic Investment Alliance that will aggregate $20 billion to deploy in large-scale infrastructure and real estate assets.

“So far, things are very encouraging. Actually, they’re very, very encouraging,” Michael Nobrega, chief executive officer of OMERS, said in an interview.

He said the pensions’ feedback has so far been the most positive sign in the alliance-building effort.

“They love the business model,” Nobrega said. Unlike a private equity-style fund that may charge a commitment fee upfront and a carried interest fee for performance at a later date, the alliance will only charge investors a fee of approximately 50 basis points to have OMERS manage the assets once they are acquired.

Michael Nobrega

Nobrega isn’t the only Canadian pension manager to advocate for a low-fee investment model. Leo de Bever, chief executive of the C$70 billion Alberta Investment Management Corporation, said recently that “fees are a drag” on investments, such as infrastructure deals. “Either you’re going to see the direct model or the club model” for infrastructure investment in the future, he predicted.

Either you're going to see the direct model or the club model

Leo de Bever

Nobrega said the pension isn’t charging a lot of fees on the club he is creating because doing so wouldn’t make a big difference in its overall ability to pay its pensioners. OMERS’ monthly payments to its pensioners range between C$150 million to C$200 million. “So us making an extra C$50 million a year from fees doesn’t really doesn’t do it for us,” he said.

Instead, the pension can meet those obligations by getting stable, 8 percent to 10 percent cash returns. “You don’t get that by doing the small projects. You get that by moving up the food chain to get these large preferential products,” he said. And because OMERS would not be able to afford these “preferential products”, often multi-billion dollar investments, on its own, it decided to create the global alliance to line up money for the purpose.

Leo de Bever

OMERS has already authorised its participation in the alliance, which would constitute one-fourth, or $5 billion, of the overall $20 billion total. It is also hoping to get $5 billion of participation from US pensions, another $5 billion from Europe and a final $5 billion from big pensions in the rest of the world.

OMERS decided to create a feeder fund in the US, Nobrega said, because of the “fractured” nature of the pension fund industry. That is, there are a lot of pension funds in the US and not all of them allocate capital to infrastructure.

Making an extra C$50 million a year from fees really doesn't do it for us

Michael Nobrega

Nobrega’s goal is to aggregate no more than 10 pensions to commit to the feeder fund. He hopes to identify the participants identified by the end of the year and have soft commitments in place for the fund.

Yucaipa was chosen for the aggregation effort, he said, because OMERS had an existing relationship with the firm as a limited partner and could also leverage its contacts.

“Yucaipa is very close to the public pension funds, and the Grand Fund is closer to the labour funds, and we would like to have a fair amount of labour component in this aggregation,” Nobrega said.

OMERS is also carrying on conversations with potential alliance participants in Europe and the rest of the world. “The funds in Europe and Asia tend to be much more consolidated than in the United States, so there are fewer players to go to, so those things will happen very quickly ” Nobrega said.

“Hopefully, by the end of April we will finalise whatever arrangements we will make in Europe and in Asia,” he added.