OMERS infrastructure program writes new page in investing

When OMERS executives closed a $12.5 billion-plus infrastructure co-investment program in June, they raised money not only from large institutional investors, but also from money managers looking to expand their businesses into infrastructure.

In this way the C$65 billion (US$59.8 billion) Toronto-based pension fund has managed to beat the money management industry at its own fundraising game.

OMERS, the Ontario Municipal Employees Retirement System, long has been spreading its “brand” by setting up several money management subsidiaries, including its infrastructure unit, Borealis Infrastructure.

OMERS' newest infrastructure effort is a novel twist. The pension fund has raised the co-investment money for its Global Strategic Investment Alliance. The alliance is designed as a pool to co-invest with OMERS, which made a $5 billion commitment to the alliance.

The alliance is the first time Borealis Infrastructure will be investing capital for outside investors. (OMERS has had the authority to manage third-party money since 2009.)

Borealis Infrastructure is the general partner of the alliance, which has a 15-year lockup, much longer than the typical private equity fund.

The alliance will invest in stable, revenue-producing large projects including airports, railways, ports, gas pipelines and power generation and distribution, mainly in North America and Europe.

Rosewater Global, another OMERS subsidiary, is providing administrative support to the alliance.

Borealis Infrastructure executives were on the road fundraising for more than two years, and the firm held its first close on capital for the alliance with $7.5 billion in 2012.

The alliance has attracted a diverse group of investors — including Japan's Government Pension Investment Fund, Development Bank of Japan, Pension Fund Association of Japan, a consortium of Japanese companies and pension funds led by Mitsubishi Corp., and money manager McMorgan & Co.

The commitments “provide a strong endorsement of both OMERS' strategy of developing third-party capital relationships with like-minded institutional investors as well as the investing strength of ... Borealis Infrastructure,” George Cooke, chairman of the board of directors of OMERS Administration Corp., which oversees OMERS' investment strategy and administration, said in a written statement released in March when Japan's US$1.25 trillion GPIF committed.

The alliance was aimed at big investors; the minimum commitment was $1.25 billion, Lori McLeod, director, media relations at OMERS, said in an e-mail.

To participate, McMorgan raised $1.325 billion for its first infrastructure fund, said John Santaguida, CEO. McMorgan executives began raising their fund in March 2013 and it took over a year to complete, he said. San Francisco-based McMorgan was the sixth and final investor admitted before the June 30 closing.

The firm's client base is about 64% union pension plans, and endowments, foundations and non-union pension funds make up the rest, Mr. Santaguida said. McMorgan's fund gave smaller investors a way to participate in the alliance.

“It's a fairly unique opportunity,” Mr. Santaguida said, noting his firm hasn't invested in infrastructure until now.

The board of the $14.1 billion Hawaii Employees' Retirement System, Honolulu, initially made a $50 million commitment to the McMorgan infrastructure fund, pending final review and successful negotiation of contract terms. But the commitment was not made because pension fund officials could not come to terms with McMorgan, said Vijoy Chattergy, chief investment officer of the pension fund.

Still, Mr. Chattergy is a fan of the alliance. “From an investment perspective, getting to invest with OMERS-Borealis and other large institutional investors is a fantastic opportunity, particularly for a plan of our size and limited allocation to infrastructure,” Mr. Chattergy said.

The pension fund has an infrastructure allocation amounting to $175 million to $200 million, requiring roughly $250 million in commitments, which Mr. Chattergy anticipates will be invested over the next two years or so.

OMERS will act as general partner of the alliance, performing such duties as underwriting potential investments, structuring the debt and managing the assets, Mr. Santaguida said. Borealis is the asset originator and asset manager for the alliance program, Ms. McLeod said.

Borealis will continue to manage the existing OMERS infrastructure portfolio and find new deals, according to an analysis by Seattle-based investment consultant Wurts & Associates for the Fresno County Employees' Retirement Association, which opted not to participate.

Transactions that Borealis finds valued at more than $2 billion are considered “alpha assets” and must be offered to the alliance, the Wurts analysis said. Deals between $1 billion and $2 billion may be offered to the alliance but don't have to be. Those valued at less than $1 billion will not be offered.

Investors will be able to decide which deals they wish to participate in on a transaction-by-transaction basis.

The alliance was launched at a time that large institutional investors worldwide are seeking to jettison the private equity-style fund in favor of direct investment in infrastructure. Some 57% of institutional investors said direct ownership is the best way to invest in real assets, with 43% already doing so, a survey conducted in the second quarter for Hamburg, Germany-based alternative investment manager Aquila Capital Concepts GmbH found.

Stuart MacDonald, managing director at Aquila Capital, said institutional investors increasingly will seek out co-investment opportunity, especially alongside other like-minded institutional investors.

Currently, Aquila Capital is raising capital from large institutional investors that will co-invest in hydroelectric power projects with APG Asset Management, Heerlen, Netherlands, which oversees assets of the e325 billion pension fund ABP, also in Heerlen.

The Aquila Capital-APG deal will have a 25-year lockup and a minimum commitment of e50 million ($65.9 million). APG committed e250 million and Aquila Capital is raising another e250 million from other institutional investors.

Like the OMERS alliance, investors in the Aquila group also may pick and choose their investments, and Aquila will manage the assets. It is the first time Aquila has participated in a co-investment strategic partnership of this size, Mr. MacDonald said.

Part of the appeal to institutional investors for these types of co-investments is the ease of execution, Mr. MacDonald said. If Borealis or APG has put its stamp on a deal, it means a giant investor has done extensive due diligence, he said. “Other people's due diligence is no substitute for one's own,” Mr. MacDonald said, but it does provide comfort to the rest of the investors as they conduct their own due diligence.

What's more, there is a greater degree of transparency because the institutional investors will directly own the infrastructure projects rather than own a slice of a fund that owns the projects. Investors know who their fellow investors are on each project and they are given more information on the projects.

“There are plenty of very large institutional investors that don't want to invest in funds,” he said.