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Friends in Ontario

Following an internal reorganization, OMERS Capital Partners is going forward with a C$4 billion mandate that emphasizes the cooperation between its direct investing and fund investing sides By Art Janik, Associate Editor

Though OMERS Capital Partners as a brand name has only been around since last year, the group, under the guise of the Ontario Municipal Employees Retirement System (OMERS), has been investing in the private equity class since 1995. The new moniker is part of a recent reorganization at the pension fund, which invests on behalf of more than 340, 000 municipal workers in the province and is counted as one of Canada's largest institutional investors, with net assets under management totaling almost C$36 billion ($30 billion; €25 billion) at the end of the 2004 fiscal year.

Today, the OMERS Capital team has a mandate to invest up to 10 percent of the pension's current assets, or approximately C$4billion, according to senior vice president Don Morrison. Half of that amount goes to the fund investment side, headed by senior vice president David Rogers, while the other half is allocated to the direct and co-investment side, led by Morrison. He says the relationship between the two halves of the private equity group also lends itself to identifying good direct investment opportunities.

?Our strategy is twofold: to own or control companies in Canada and to team up with our existing GPs in our funds group and co-invest with them,? Morrison says. ?We can get involved in a meaningful way early on by participating in the due diligence process.?

OMERS Capital operates as a wholly owned subsidiary, as do many of the private equity arms of Canadian pension funds (eg, Teachers'Private Capital and Caisse de depot et placement du Quebec). Morrison says the group has even been migrating to a more traditional private equity compensation structure. OMERS Capital has competitive market-based short-term incentive plans, as well as long-term incentive plans that are not traditional carry, but what he calls a ?bit of a hybrid where we have long-term alignment with the fund. It provides a strong incentive to motivate people to hang around here for a long time.?

?We … want to be a first call on our existing fund relationships so we can team up with them on coinvestment opportunities. Having a strong funds program is great complement to direct investing.?

OMERS Capital Partners' direct investment team looks for deals ranging from C$20 million to C$200 million, with a ?sweet spot? of between C$40 million and C$60 million. Currently, the direct investment portfolio includes 20 companies and is worth approximately C$900 million.

Morrison says the group is prepared to initiate lead or co-lead buyout deals in Canada, and looks to partner up with well-aligned funds or strategic partners. In addition, the group explores opportunities in the Northeast US, where OMERS Capital can be ?more involved and more engaged because we're only a short plane ride away.?

Though the group employs a generalist industry strategy, especially in Canada, Morrison points out that ?you have to be more open and opportunistic. You can afford to be more focused in the US, where we are getting our focus and diversification through a lot of our fund relationships there.?

MAKING FRIENDS
For OMERS Capital, forging relationships with other private equity funds is critical to gaining more leverage and reaching into all kinds of different markets, explains Morrison. This is particularly important for Canadian private equity and venture capital firms in general, as many Canadian GPs often have a difficult time forging professional relationships with their cousins to the south.

?We get a lot of first looks and see a lot of opportunities that we would not if we had not had those relationships,? Morrison points out. ?As we see opportunities in Canada, if we're looking for a competitive edge or angle to improve our investment thesis, we will look to bring up our fund partners if they have a specific focus, and will team up with them for these deals.?

For example, in late 2003 OMERS Capital completed the C$640 million privatization of Canadian bathtub and shower maker Maax in a partnership with Boston buyout firm JW Childs Associates. The deal, majority owned by JW Childs is one of Canada's largest public-to-private transactions ever.

?There are funds out there that we're looking to do co-investments with that aren't fundraising yet but soon will be,? Morrison says. ?They want to get to know us and demonstrate the strength and depth of their team. That makes for a great opportunity to get to know them before we invest with them ? we get to know their process, their people, the quality of their due diligence. We're there, working with them, side by side.

?We also want to be a first call on our existing fund relationships so we can team up with them on co-investment opportunities. Having a strong funds program is great complement to direct investing.?

Offices: Toronto Founded: 2004 (Wholly owned subsidiary of the OMERS Pension Fund) OMERS has been investing in private equity since 1995 Total employees: 14 employees in the Private Equity Group FIRM MANAGERS Senior Vice Presidents: David Rodgers, Donald Morrison, John Young Vice Presidents: Mike Graham, Jennifer Morais, Lisa Melchior, Martin Day, Dominique Hansen Capital Committed: OMERS, C$4 billion Other Funds: 40 GP Fund relationships around the world Total Uninvested Capital: C$2 billion Invested Capital since inception: C$2 billion Number of current portfolio cos: 19 Exits since inception: 12 Number of LPs: 1 (OMERS) Software & Systems: Investran (Accounting, CRM) Private I (Accounting) Other Key Professional Relationships: PWC (Accounting) KPMG (Accounting) Oslers (Legal) Gowlings (Legal) Torys (Legal)