With significant stakes in Canadian middle market investing, OMERS and Ontario Teachers PPB are illustrative of direct pension participation. The former was one of a handful of pension funds engaged extensively in merchant bank-like activity in the 1980s when leveraged buyouts were of prevailing interest to large institutional investors.
Inception of the Merchant Banking and Private Placement program at OMERS occurred in 1981, but it was not until the 1990s that it became fully administered on an in-house basis. Over the years, new investments have averaged 10-15 per year. Today, the OMERS portfolio is broadly representative of core event-driven transactions in the middle market with individual investments sized at between $10-50 million or above. Over the years, new additions to the portfolio have averaged 10-15 per year. While market agents and co- investors suggest potential deals, OMERS also encourages a direct flow through advertising of its program's mandate.
The Merchant Banking and Private Placement program at OMERS utilizes a range of financial instruments, the most prominent being approximately $600 million in non-venture equity. Around $200 million is also apportioned to intermediate and long-term loans, available for financing medium-sized or larger enterprises independently or in strategic combination with equity in layered deal structures. Where necessary, subordinated debt may also play a role. In mid-1998, the portfolio value of the OMERS program was close to 2.7 percent of total plan assets, a level that may be raised to 5 percent, future circumstances permitting.
The approximately seventy investment projects that currently receive OMERS debt and equity placements suggest the middle market's traditional industrial mix, plus some business of specific interest, such as oil and gas and established high technology. 60 percent of all investing, direct and through partnerships, is in Canada. Along with their merchant banking operations, eight internal managers handle OMERS infrastructure projects as well as venture capital commitments to external limited partnerships (see Pension Funds and Venture Investing).Endnote 69
The in-house Merchant Banking Group of Ontario Teachers PPB has functioned chiefly as a private equity investor since 1991, though in 1998, it added mezzanine financing to the mandate. Evolving rapidly over its very short history, this program has participated in over eighty investment projects averaging about $20 million in size. The bulk of these have been leveraged management buyouts. One illustration is the acquisition of the Ontario metal and plastics manufacturer ATS in by 1992, by management's purchase of majority interest from the non-resident parent. This was followed a year later by public offering.
Generally speaking, Ontario Teachers PPB is interested in medium-sized and larger business clients seeking a private placement alternative to going public. Like most large institutional investors, it prefers investment deal sizes of $50 million and above, however, the relative scarcity of these has led to increasing concentration on those in the middle market of less than $25 million. Deal flow comes directly to the Merchant Banking Group, from market agents and intermediaries and from regular co-investment partners.
At the end of 1997, the total investment portfolio was valued at $1.7 billion or approximately 3 percent of total plan assets. Asset allocations have risen steadily over the years and, like OMERS, may yet reach 5 percent exposure, subject to long-term market developments. Two-thirds of investee firms are Canadian, the majority of which are found in Ontario, and situated in a variety of traditional industries, though some are established technology-intensive companies. A twelve-strong management team at Ontario Teachers PPB also administers venture capital commitments to external partnerships and pools (see Pension Funds and Venture Investing).Endnote 70
As its name implies, Penfund Management originated by syndicating the assets of pension funds, beginning in 1976, with a mandate for middle market investing. Since the late 1970s, it has invested close to $2 billion. This has been accomplished by collaborations with dozens of plans (and other institutional investors), through Penfund Capital (No. 1) - the pension-owned pool that capitalizes all portfolio projects - and through leveraged co-investments, generally on deals exceeding $5 million.