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Institutional Investor Profile: Paul G Renaud, Senior Vice President and Chief Financial Officer, OMERS
02/08/2006. Source: AltAssets. 
Paul G Renaud on why OMERS is increasingly interested in alternative assets, on the pension fund's investment strategy, and on why this year is a good year for private equity investors looking to invest in top-tier funds.  The Ontario Municipal Employees Retirement System is a Canadian public pension fund with approximately $43bn of assets under management. About ten per cent or $4bn of the total $43bn are allocated to private equity investments. Out of the $4bn about $2.5bn or six per cent of the pension fund have actually been committed to private equity investments to date.
OMERS, established in 1962 to serve local government employees across Ontario, now represents about 900 employers, 260,000 members and 100,000 retirees.
Renaud, a chartered accountant, joined OMERS in November 2004. He is a senior vice president and chief financial officer at OMERS and the president and chief executive officer of OMERS Capital Partners. His 22-people strong team is located at OMERS's headquarters in Ontario. Prior to OMERS, Renaud was executive vice president and chief financial officer of CAE, a provider of simulation technologies and integrated training services to airlines, aircraft manufacturers, defence forces and marine customers.
OMERS has recently increased its target allocation to alternative investments. What is the new target allocation?
'In 2003 OMERS increased its target allocation to investments in alternative assets to up to 40 per cent of the fund from 15 per cent previously, based on the belief that private investments will deliver higher and more stable returns in the long term when compared to public investments. Besides private equity, alternative investments for OMERS also include infrastructure and real estate.'
On the private equity side, what type of investments do you look for?
'Between 70 and 80 per cent of our private equity commitments are commitments to private equity funds (about 75 per cent buy-out funds, about ten per cent venture capital funds, and about 15 per cent other funds including distressed and mezzanine funds). The balance is invested in direct investments or co-investments.
By geography, today about 30 per cent of our commitments are in Canada, 50 per cent in the US, and between 15 and 20 per cent in Europe (more predominantly in Western Europe, especially in the UK, in France and in Germany). We also have a few investments in Asia/rest of the world.
Asia is relatively new to us. We only started looking at the region about two to three years ago. Our investment in Asian funds is relatively modest today, but we are currently reviewing the Asian space to determine whether we should increase our allocation to the region. I expect that Asia will play a much bigger role in the future. Currently everybody talks about China and India as the hot markets. However, we need to do our own research to figure out where the opportunities are.'
How many funds do you have in your portfolio and what is your bite size?
'On the buy-out side, we target to have between 20 and 25 relationships. The largest of our recent investments was a $250m investment in a mega buy-out fund. Our average investment size is probably in the region of $100m.
We expect to have a number of venture capital relationships where investment size ranges from $10m to $15m.'
Do you prefer generalist or specialist funds?
'Our strategy is to combine generalist and specialist funds in our portfolio. We have funds in our portfolio that are more generalist, funds that go across a variety of industry sectors; and then we have a number of industry sector-specific funds. The industry sector-specific funds are mainly located in the US.'
How significant are your direct investments?
'We only do a few direct investments, and we only do them when we find opportunities close to our Ontario headquarters - ie Canada. Canada is the direct investment market that we know best. It is much easier to actively manage business in markets that you understand and that are close to your home base.'
How do you find out about good fund investment opportunities?
'Having been a private equity fund investor for quite some time, we have a significant amount of information in-house. Over the years we have been building relationships with GPs and other people within the private equity industry. We know most GPs and their track records. A good portion of our investments are re-ups.'
How do you conduct your due diligence?
'Our due diligence process depends on whether it is a re-up situation, or a firm whose previous fund may have declined, or whether it is a completely new fund. For re-ups, our due diligence process is usually the shortest. As we know the GP's history, our due diligence focuses more on their more recent transactions, a review of the performance of companies in the current portfolio and the people at the firm. It is important to have a good idea of how likely it is that the key players stay at the firm for the duration of the investment and realisation periods. If applicable, we want to see how succession issues are being handled. Planned changes such as investment strategy shifts and significant increases in fund sizes need to be evaluated.
If we rejected a fund in the past, there was a reason for it. When one of those teams approaches us with their new fund, they will need to convince our team that the issues have been addressed.
For first-time funds, our due diligence focuses very much on assessing each individual's track record from prior experiences. We also analyse the chemistry and economics between the team members. We are not very likely to invest in first-time funds raised by first-time teams.'
What do you look for in a good private equity manager?
'We want to see excellent track records supported by great teams.'
What are the main reasons for rejecting funds?
'Poor returns, people and/or succession issues are reasons for rejecting funds.
Other reasons why we have rejected funds are that a fund invests in an area in which we have already reached our level of commitments.'
How many investments do you intend to make this year?
'This year is another great year for investments in private equity funds. Our original target allocation for 2006 was $800-900m on up to ten deals. We know already that we will definitely exceed our target because so many funds we have targeted are in the market.'
What advice would you give to a new private equity investor?
'Having good relationships with GPs is very important in this market. You need a thorough due diligence process to evaluate who the best performers are - not only today but more importantly in the future. Maintain a disciplined investment approach and therefore do not invest for the sake of putting money to work.'
How do you think private equity firms will perform in the medium-term future?
'Currently there is a lot of money coming into the asset class, which is a concern but there is also a lot of investment opportunities. With a disciplined investment approach you will still be able to achieve good returns.'
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