Why no carry, OMERS?

The C$60billion Ontario Municipal Employees’ Retirement System is currently seeking about three partners for a C$20 billion “global strategic investment alliance with like-minded investors to jointly own large-scale infrastructure and real estate assets”. The alliance, the brain child of OMERS CEO Michael Nobrega, is set up so that the LPs can bypass the GPs but still get great access to deals by virtue of the sheer amount of capital they have to deploy.

The idea is generally being well received, but if there is any opposition, it’s from investors wondering why OMERS and its affiliates wouldn’t charge carried interest on the vehicle, Nobrega said.

The fee structure is as follows: two of OMERS’ investment arms, Borealis and Oxford, will source and manage investments. In the first five years, Borealis and Oxford will receive an annual asset management fee of 50 basis points on equity under management. A management board that will oversee the alliance will charge an additional fee of 35 basis points on invested capital to reimburse expenses.

There will be no fees levied on uninvested capital. Every fifth year from the official signing of each asset management contract, Oxford, Borealis and the alliance members will have the right to ask for a review of the fee structure.

Oxford and Borealis will not have a carried interest, nor will they charge acquisition or disposition fees beyond reimbursement for out of pocket third-party costs normally associated with transactions.

Some in the market have questioned how Oxford and Borealis will be incentivised to care about the long-term success of the deals they source if they aren’t earning carried interest. But Nobrega said that what OMERS really wants to get out of the alliance is access, not performance fees.

“What we’re trying to do is get access to large-scale, alpha projects. And having an extra fee here or there really doesn’t do it for us,” Nobrega said. “We really need to get the preferential product through capital formation. And that’s where the pension fund makes its wind – not through a carried interest.”

He also pointed out that even a 20 percent carry on the alliance’s investments wouldn’t exactly be a windfall for the enormous pension fund anyhow.

“I know that sounds altruistic to some extent, but OMERS’ pension payroll is north of C$2 billion a year. That’s 150-200 million a month. So making an extra $50 million a year from fees doesn’t really doesn’t do it for us,” he said. “What we need to do is get access to those long-term, stable cash flows for 10, 15 years at 8 percent to 10 percent cash-on-cash returns, and 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.”

Cezary Podkul contributed to this article.