TORONTO — The Ontario Municipal Employees Retirement System is doubling its alternative investments in an effort to keep from becoming underfunded, which is expected in 2005.
At the same time, the fund also is taking control of its alternatives and real estate investment management, buying out the interests of co-investors in Borealis Capital Corp. and investing its infrastructure, real estate and private equity money through companies that are wholly owned by the pension plan, said Debbie Oakley, senior vice president of the C$32.7 billion (US$24.4 billion) OMERS. (All asset figures in the story, unless otherwise noted, are in Canadian dollars.)
"The general direction is that we want to manage as much internally as we can, but we will continue external investment management in certain circumstances," said Jane Courtemanche, vice president, corporate communications at OMERS.. "The trend is more accountability to OMERS."
Culminating a yearlong asset-liability study, the pension plan's board adopted a new target asset allocation last month that will dramatically increase the fund's investment in private equities, infrastructure and real estate over the next four or five years, to 37.5% of total assets, from 18%. Meanwhile, the fund's investments in stock and fixed income (excluding inflation-indexed bonds) will be cut to 57.5% from 79.5%. The fund already is over its old target allocations in a couple of asset classes, including real estate and infrastructure.
The biggest change is in infrastructure, the allocation to which is increasing 14 percentage points, to 15% of total assets. The portfolio makes long-term infrastructure investments, including in nuclear power; the Confederation Bridge, which linked New Brunswick and Prince Edward Island; and the Detroit River Tunnel, a multiphase project that includes building a high-capacity rail tunnel under the river and converting the existing rail tunnel to a truck tunnel.
The allocation to private equity is nearly doubling, with the fund targeting 10% of total assets, an increase of 5.5 percentage points. Real estate remains at 12.5%.
Slashed will be the fund's public equities, dropping 12 percentage points to 42.5%, and fixed income, dropping 10 percentage points to 15%. However, the allocation to real return (inflation-indexed) bonds, which the fund lists as a separate asset class, also doubled, to 5%.
To increase the fund's oversight and control over the new asset mix, OMERS essentially brought the investment management of its infrastructure, real estate and private equity portfolios in-house, investing the assets through three wholly owned investment management companies.
Borealis Capital managed $9.4 billion in real estate, private equity and infrastructure investments for OMERS. The management firm, which OMERS created six years ago as an internal vehicle for infrastructure projects and then spun off three years ago, was jointly owned by OMERS; the $66.3 billion CPP Investment Board, Toronto; and Kilmer Van Nostrand Co., a Toronto-based private investment holding company. Now, OMERS has acquired full ownership. (Terms of the deal were not released.)
"We wanted to set up companies we owned and operated that would be in the direct line of sight and have clear accountability," Ms. Oakley said. "They were managing the funds for us and other shareholders. We bought the other shareholders out."
(The CPP Board had a $75 million commitment to the $375 million Borealis Private Equity Fund, said John Cappelletti, manager-communications and stakeholder relations with CPP Investment Board. Those assets will stay with the Borealis fund, he added.)
OMERS executives changed the name to Borealis Infrastructure Corp., and named Michael Nobrega, who had been managing principal and president of Borealis Capital, as its chief executive officer. Its new mandate will be to implement global infrastructure investments and build on OMERS' current $1 billion infrastructure portfolio.
OMERS' $7.7 billion real estate portfolio will now be managed by Oxford Properties Group, which OMERS acquired in 2001. Oxford had been OMERS' property manager, while the assets were managed by Borealis and internally by OMERS staff. No fund staff were let go because of the change.
Michael Latimer was named Oxford's president and chief executive officer; he was managing principal and chief operating officer of Borealis Capital. Since December, Mr. Latimer also had been acting president and CEO of Oxford, replacing Stuart Smith, who left to pursue other interests.