Only two years into the top investment job at OMERS, Ralph Berg has made his mark, dramatically re-engineering the investment programs, adjusting the geographical focus and getting ready to buy as M&A markets open up. Amanda White reports.
Ralph Berg, chief investment officer at OMERS for nearly two years, brings a fresh perspective to pension fund management with a history and work pedigree different to what you might expect from a Canadian fund investment boss. He was born in the United States to German parents and grew up in Argentina, and while he works for a Canadian fund he lives in London. An economist and lawyer by training, he describes himself as “essentially an M&A banker”. And he’s used that vast and varied experience to revamp the C$138.2 billion ($97.2 billion) fund’s approach to investing.
After nearly 20 years in investment banking, at Deutsche Bank and then Credit Suisse, in 2013 he moved to Borealis, OMERS’ infrastructure arm, to run infrastructure globally and then head the capital markets team.
In the relatively short time he has been CIO, Berg has rejigged the operating model from a “loose federation of very independent platforms” to a consolidated group of six programs.
“There were loosely defined mandates and guidelines for risk and asset classes which caused duplications and triplications,” Berg says of the investment operating model in an interview with Top1000funds.com.
“As CIO if I wanted to take the balance sheet to a desired state – for example 25 per cent in equities – I needed to flick 17 switches across global equities, quant strategies, Asian equities, multi asset; I had credit in seven different programs. There was no total portfolio view or management team… and we had an excessive number of programs.”
Berg’s stamp
Now the separate programs have been consolidated into six streams; three public and three in private investments.
OMERS created a single equities program of managed from New York, with the research and portfolio management in separate functions.
There is also now only one global credit group which manages any style of credit including investment grade, leveraged finance, high yield, private credit, external private credit and structured credit. The majority of the 27-people team are in Toronto but there are also people on the ground in NYC and Singapore.
The third public investments group is the global multi asset strategies group whose activities include an absolute return quant approach which runs very efficiently.
“It is efficient as a vehicle and very swift,” Berg says. “If I want to make big sudden changes in the balance sheet that’s the place.”
Under Berg a new total portfolio management unit has been formed, which includes the trading team and a newly created capital allocation team, that advises Berg on the best asset mix to achieve the desired returns.
That team also includes portfolio analytics (that explores for example the role technology, AI and data can play) and a strategy team to support the total portfolio management team and the CIO’s office.
The dominance of unlisted assets
OMERS is a very mature fund, crossing the Rubicon of paying more than it receives about three years ago. This naturally means the investment team needs to be especially careful with cash.
“We have to live off the capital base of what we have, and protect what we have,” Berg says.
It’s somewhat of an anomaly that a fund which has liabilities greater than its assets, putting liquidity risk front and centre, would have so much invested in unlisted assets. Now about 55 per cent of the fund is invested in infrastructure, real estate and private equity (PE), and a very strong and long heritage in infrastructure and real estate underpins the fund.
“We have one of the top 10 players in infra globally, I would argue we have the best of the directs in infrastructure, with the very big advantage of being early in that space,” Berg says.
The fund has been invested in infrastructure for 18 years. What started small as a sandbox experimental exercise, turned into a symbiotic relationship between the fund and the social infrastructure needs of the municipalities of its membership. OMERS would build the hospital and then lease it back to the municipality agreeing to a fixed payment.
“This would deliver a very high-quality asset with low risk and volatility, and this became the early model of Borealis,” Berg says. “It was a naturally-aligned client.”
That model continued to thrive and then in 2003 OMERS made its first large scale infrastructure investment, allocating C$1 billion in a power plant in Ontario buying it from British Energy, a forced seller.
“That was the step where we stopped doing [small deals] and moved to very large infrastructure projects,” he says. “Because of the scale it is much more efficient to manage those assets, so the implications for the portfolio was very positive.”
A gas network in the UK became its first international investment in 2003 and expansion followed with offices in London, New York and Sydney. Today it owns 33 infrastructure assets with C$36 billion in AUM, or 23 per cent of the total fund. Each asset is about C$1 billion so the investments are larger and more efficient, with no individual market more than 35 per cent of the infrastructure portfolio.
Oxford Properties is the OMERS real estate business with more than 15 years of investment experience and a focus on Canada, US, UK, Australia, France and Germany.
“That’s been a very stable and very successful business for us with a strong component of cash generation which is a natural fit for the pension plan,” he says. “The fundamentals we like in real estate and infrastructure are the long-term nature – predictable returns, low risk, and the return that comes in the form of cash.”
Private equity is the final piece of the puzzle with investments dominated by the buyout program. In September last year, after analysing performance and deal flow, Berg decided to switch to fund investing in Asia and Europe and to focus on buyouts in North America.
“I came to the view based on data and performance we don’t have the scale to afford the quality origination and asset management required to efficiently do control deals in Asia or Europe,” he says. “We decided to focus on our buyout efforts in North America.” That group employs around 65 people across New York and Toronto.
The fund also recently formed a new external funds management group within private equity, called private capital headed by Michael Block. This is where the historical group of OMERS Ventures, which had some success in financing pharma in particular, and a legacy portfolio in green tech, will now be housed. Through this new group it will continue to invest in life sciences and venture capital and invest with external partners in funds and co-invest.
Future opportunities
While the fund is heavily invested in private markets, a one balance sheet approach which focuses on three things: returns (performance), risk (volatility), and liquidity is front and centre for Berg.
He meets regularly with a group made up of the six business heads plus the head of risk and head of total portfolio management to focus on funding, capital allocation and risk.
For many years the returns from the fund’s unlisted assets provided a predictable cash return to derisk the public markets. OMERS, like many, has taken a hit with the repricing of assets but Berg believes the “lion’s share of the adjustment has taken place”.
“We are starting to see green shoots in the M&A market, investor interest in auctions, and bids at fuller multiples,” he says.
“Financial markets and the banking system is in great health and the lending market remains extremely supportive. One area we have been successful in the last 18 months is in refinancing debt in investee entities in PE and infra, which allows very immediate value creation. The credit market has not seen a lot of primary supply, and we have not seen a lot of deals. We are starting to see LBO [leveraged buyout] activity pick up again. I think we have gone through the worst. Could I say the adjustment is completed, no, because the last mile in the fight towards reducing inflation is always the hardest one.”
While in recent history central banks have been synchronised, now different growth and jobs levels in different countries means a different approach to interest rates, with US the standout, Berg says.
“It is our expectation the US will go from strength to strength in the near to medium term while Europe, Canada and the UK will lag,” he says.
The portfolio has been adjusted geographically to reflect those views with the US about 53 per cent of the portfolio, followed by Canada (19 per cent), Europe (17 per cent), Australia, Asia and the rest of the world (11 per cent).
“Asia and Australia are at the lowest levels. We think there will be great opportunities to add again in Asia and Europe and we are ready for that. There is no doubt in the next couple of years as M&A markets open up it will be a buyer’s market.”
