OMERS | Pension360

Ontario Municipal Pension Buys $227 Million Paris Office Building

Oxford Properties Group, the real estate arm of the Ontario Municipal Employees Retirement System (OMERS), has completed the $227 million purchase of Paris office building, according to the Wall Street Journal.

The pension fund is make nearly $800 million worth of investments in Paris over the next three years.

Video: Canadian Plans Push Back Against Proposed Regulations

Three of Ontario’s pension plans — the Healthcare of Ontario Pension Plan (HOOPP), the Ontario Municipal Employees Retirement System (OMERS) and the Ontario Teachers’ Pension Plan — are protesting a section of a new Act that would place pension plans under the regulatory power of a newly-created securities regulator.

Pension plans are calling the proposal “unbelievable”. Watch the video for more.

Video credit: Daily Globe and Mail

Feature Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Pension Funds Look to Place Bets on Shipping Recovery

Some pension funds are thinking of buying a boat.

More specifically, they are weighing investments in the shipping industry, which some observers say is due for a recovery. If the industry does rebound, pension funds want to be among the beneficiaries.

But they are treading these waters carefully.

Reported by Reuters:

Pension funds, squeezed by low interest rates, are exploring investments in shipping in their hunt for higher returns, hoping to benefit once this industry starts to recover from one of its worst ever downturns.

There are signs of a gradual pick-up in world trade and ship values for the first time since the financial crisis. Ship financier NordLB has said the market could see a broad recovery but not before 2016.

The industry’s revival could deliver double-digit returns for pension funds that decide to add shipping to their so-called alternative assets such as infrastructure, which can make up about 15 percent of a fund.

But they need to do their homework.

Some hedge funds and private equity firms have been burned by diving into shipping too early and have found the recovery they were betting on has taken longer to materialise.

So far only a few pension funds have taken the plunge, also partly because of the need for specialised knowledge on shipping, such as how to price vessels accurately.

One pension fund leading the way is Ilmarinen in Finland, which had 34 billion euros ($41.8 billion) in assets at end-September. Earlier this year, Ilmarinen acquired five oil tankers and three supply ships from Finland’s state owned refiner, Neste Oil.

Esko Torsti, head of non-listed investments at Ilmarinen, said the investment was for tens of millions of euros through a new joint-venture firm owned by the pension fund and Finland.

“Investing in ships is not the easiest area, it requires extreme carefulness and special expertise,” Torsti said.

Another potential driver for investment is the shipping industry’s growing funding gap that has opened up as banks scale back lending due to capital constraints.

The combined value of ships on the water is estimated at $1.25 trillion with a further $380 billion in ships on order.

Among the pension funds that have taken the dive: Canada’s OMERS, Britain’s Merseyside Pension Fund and Finland’s Ilmarinen.

Photo by Louis Vest via Flickr CC License

Lessons In Infrastructure Investing From Canada’s Pensions

Canada’s pension plans were among the first in the world to invest in infrastructure, and they remain the most prominent investors in the asset class.

Are there any lessons to be learned from Canada when it comes to infrastructure investing? Georg Inderst, Principal of Inderst Advisory, thinks so.

In a recent paper in the Rotman International Journal of Pension Management, Inderst dives deep into Canada’s infrastructure investing and emerges with some lessons to be considered by pension funds around the world.

The paper, titled Pension Fund Investment in Infrastructure: Lessons from Australia and Canada, starts with a short history of Canadian infrastructure investing:

Some Canadian pension plans, notably the Ontario Teachers’ Pension Plan (OTPP) and the Ontario Municipal Employees Retirement System (OMERS), were early investors in infrastructure in the late 1990s and early 2000s, second only to Australian superannuation funds. Other funds followed, and the average allocation has been growing steadily since, reaching C$57B by the end of 2012 (5% of total assets). Here, too, there is a heavy “size effect” across pension funds: bigger pension plans have made substantial inroads into infrastructure assets in recent years (see Table 2), while small and medium-sized pension funds have little or no private infrastructure allocation.

The main driver for infrastructure investing appears to be the wish to diversify pension funds’ assets beyond the traditional asset classes. While Canadian pension funds have been de- risking at the expense of listed equities, regulators have not forced them into bonds, as was the case in some European countries. Real estate and infrastructure assets are also used in liability-driven investing (LDI) to cover long-term liabilities.

Canada frequently makes direct investments in infrastructure, an approach that is now being tested by pension funds around the world. From the paper:

According to Preqin (2011), 51% of Canadian infrastructure investors make direct investments, the highest figure in the world. This approach (known as the “Canadian Model”) has attracted considerable attention around the world, for several reasons:

• lower cost than external infrastructure funds

• agency issues with fund managers

• direct control over assets (including entry and exit decisions)

• long-term investment horizon to optimize value and liability matching

This direct approach to infrastructure investment must be seen in the context of a more general approach to pension plan governance and investment. Notable characteristics of the “Maple Revolutionaries” include

• Governance: Strong governance models, based on independent and professional boards.

• Internal management: Sophisticated internal investment teams built up over years; the top 10 Canadian pension plans outsource only about 20% of their assets (BCG 2013).

• Scale: Sizable funds, particularly important for large-scale infrastructure projects.

Potential challenges for the direct investing approach include insufficient internal resources, reputational and legal issues when things go wrong, and the need to offer staff market-based compensation in high-compensation labor pools.

Despite these challenges, however, the direct internal investment approach of large Canadian pension funds is now being tried in other countries. Other lessons from the Canadian experience include the existence of a well-functioning PPP model, a robust project bond market, and long-term involvement of the insurance sector.

Finally, the paper points to some lessons that can be learned from Canada:

Lessons learned include the following:

• Substantial infrastructure investments are possible in very different pension systems, with different histories and even different motivations.

• Infrastructure investment vehicles can evolve and adjust according to investors’ needs. In Australia, listed infrastructure funds were most popular initially, but that is longer the case.

• Pension plan size matters when investing in less liquid assets. Private infrastructure investing is driven primarily by large- scale funds, while smaller funds mostly invest little to nothing in infrastructure. In Australia, two-thirds of pension funds do not invest in unlisted infrastructure at all.

• Asset owners need adequate resources when investing in new and difficult asset classes. Some Canadian plans admit that their own estimates of time and other inputs were too optimistic at the outset.

• New investor platforms, clubs, syndicates, or alliances are being developed that should also attract smaller pension funds, such as the Pension Infrastructure Platform (PIP) in the United Kingdom or OMERS’ Global Strategic Investment Alliance (GSIA). However, industry experts stress the difficulties of such alliances with larger numbers of players, often with little experience and few resources. Decision time is also a critical factor.

The full paper offers much more insight into Canada’s approach as well as Australia’s. The entire paper can be read here.

Canada Pension Fund Begins $1.3 Billion Spending Spree on Paris Real Estate

The Ontario Municipal Employees Retirement System (OMERS) has made its first investment in what’s likely to be a line of many in Paris real estate.

The first purchase: a $337 million office building in central Paris. The pension fund says it plans to invest another $850 million in Paris real estate over the next three years.

Reported by the Financial Times:

Oxford Properties, the real estate arm of giant Ontario fund Omers, has bought a 237,000 sq ft building in Rue Blanche, central Paris, from the Carlyle Group for €263m.

Its move into Paris is the fund’s first step into continental European offices.

Michel Vauclair, an Oxford Properties senior vice-president, said it aimed to build up its Paris portfolio to €1bn in the next three years.

It will focus on “assets where we can drive value through active asset management . . . and where we believe that current values do not reflect future market improvements”, Mr Vauclair said.

Until recently the Paris property market has been sluggish, partly as a result of the country’s economic weakness and political uncertainty. But Mr Vauclair said that Oxford Properties sees “the prospect for significant growth to come through infrastructure improvements and a broader economic recovery”.

OMERS isn’t the only organization buying up Paris property. In fact, many foreign investors are flocking to the city. From the Financial Times:

Janet Stewart-Goatly, a senior capital markets director at property advisers CBRE, said the Paris market had seen a 60 per cent increase in transactions year-on-year as foreign investors flood into the market.

“If you’re looking to build up your international portfolio, you can’t ignore Paris,” she said. “There is a massive weight of capital seeking to invest.”

As a result yields are about 4 per cent for Paris’s central business district and 5.5 per cent in the La Defense business cluster, she added.

La Defense had a 12 per cent vacancy rate last year – partly as a result of a handful of large companies relocating to the Paris suburbs – but vacancies are now falling as more businesses take up space, Ms Stewart-Goatly said.

OMERS says it is targeting Paris due to an improving economy coupled with the likely leveling-off of its high vacancy rate, which the fund says is “temporary”.