The Pension Blueprint podcast video transcript

Episode 5: Where do my pension contributions go?

Jackie DeSouza: Hi, everyone, and welcome to Season 2 of The Pension Blueprint from OMERS. I'm Jackie DeSouza, and I'm so happy to be co-hosting this season with Celine Chiovitti, our Chief Pension Officer. In addition to being a podcast co-host, I'm also the Vice President of Pension Communications and Engagement here at OMERS. This means my job is to listen to our members and make sure that their voices are heard. 

One of the things that members often ask about is how their pension is funded. As you know, our members make contributions which are matched by their employers. OMERS then invests those contributions and grows them, ensuring financial security during our members' retirement years. 

To that end, we've got a great pair of guests here from OMERS' New York-based investment team. We have Prabha Ram, who is the Managing Director of Global Equities, and Eric Haley, who is the Senior Managing Director of Private Equity. They are going to talk about the difference between our public and private investment teams and how the various divisions on the investment side of the fund all work together for our members. 

So, here's my conversation with Prabha and Eric. Prabha and Eric, thanks so much for being here today. I really look forward to talking to you on The Pension Blueprint. 

Prabha Ram: Thank you, Jackie. Thank you for having us, it's an honor to be here. 

Eric Haley: Yeah, we really appreciate it. Thank you. 

Jackie DeSouza: I'd like to start by talking about how the OMERS Pension Fund is able to ensure that our members have retirement income for the rest of their lives. We know that they make contributions to their pensions, their employers match those contributions, and then that's where your teams come in to turn those contributions into investment returns that can be paid for the long term. 

So, Prabha, I'd love to hear more about how all of that works. I've heard you describe the investments your team makes in the public equity space as narratives or stories. Can you talk a little bit about what your team does, how those stories come together, and why the framing is so important to you?  

Prabha Ram: Thank you, Jackie. And for context, OMERS and Oxford invest across multiple asset classes. So, think of it as public stocks and bonds; private stocks and bonds, private equity, it's called, and that's what Eric will talk about; and real estate and infrastructure. Our team invests in the global public markets in stocks. In 2023, that number was one in five dollars of our net assets, which is approximately $130 billion. Of that, half of it is the responsibility of our team. 

We are 14 investment professionals, and when we buy shares in a company, we think of ourselves as business owners; we own a sliver of that company. So, we're thinking about the fundamentals. What about that business makes it durable? What about that business makes it grow better or have better profits than peers doing the same thing? Do they have management teams that actually can look around the bend, have a vision, and execute against that vision? That is what I call a story or a narrative. 

Now, as I said, our team has 14 people, investment professionals, and we are the authors of that narrative or that story. Our job is to dig through the financial statements of our companies, our competitors, talk to the management teams, talk to industry practitioners, and make sure that we have a thesis that tells us that this is a sustainably durable business, and a portion of those profits will then accrue to our members over time. We own a small sliver, and we want those profits to then accrue to our members. That is the narrative, the ownership of the narrative. 

Of course, we debate the narrative as it changes and as the markets give us opportunities because they twist and turn. Sometimes the fundamentals are misperceived, or sometimes the valuations don't represent the fundamentals, and that's when we pick up these durable businesses and own them on behalf of our members. 

Jackie DeSouza: It sounds like your team has to do a lot of research to determine which ones of those durable businesses are going to be able to provide those returns for the long term and pay our members' pensions. 

Prabha Ram: That, too. 

Jackie DeSouza: Okay, so Eric, now Prabha mentioned that you work in the private equity space. So of course, I have to ask you, what does that mean and how does it differ from the work that Prabha's team does on the public equity side? 

Eric Haley: Yeah, the difference, the biggest difference, is because a lot of the fundamentals like investment theses and managing risks are very similar, except that in private equity, we're actually buying businesses. We have a majority control of the business, we control the Board, and therefore, have influence on where the company is going, directionally, strategically, value creation levers, and so forth. 

So when you think about what we do day-to-day, there are two big activities. One is business development, the other one is portfolio management. Business development is coming up with investment theses within each of our different sectors: business services, healthcare, and industrials. Once the teams have developed those, they are out talking to CEOs, management teams, and experts in those fields, just doing more work, meeting with other companies to sort of understand the economics and the difference between one asset and another. 

When we find an asset we really like, we will go after it and then go into the due diligence phase. This involves us hiring outside counsel to make sure that the legal structure is all appropriate and correct, again, managing risk. We also engage with accounting firms to ensure the quality of earnings, making sure that the numbers they are telling us are accurate, thus de-risking the investment. 

We then move into commercial diligence, where we hire outside parties to help us. We do a lot of the work ourselves on surveys and talking to independents, ex-CEOs, and competitors, just to gather all that information so that we have as much information as possible before we make an investment. As part of that, we're coming up with our value creation plan because we're looking to own these assets for anywhere from five to ten years. A big part of our investment thesis is creating value and growing these businesses.  

We achieve this through various value creation strategies. There are a number of different areas we pull from, whether it be M&A, pricing strategy, go-to-market strategies, new geographies to enter into, or new services to offer. We spend a lot of time with our management team as our partners, and as controllers of the Board, we are able to significantly influence the direction of the company. 

So, that's the bigger difference between the public markets versus the private markets, where we are active investors. We have 60 investment professionals, made up of investment professionals as well as operating partners, who are executing on the value creation plans that we come up with when we invest in businesses and work very closely with CEOs, CFOs, and other C-suite executives. 

Jackie DeSouza: Right, so these businesses that we invest in, are these businesses open to being owned by owners? Like, is this something that you have to research first?  

Eric Haley: Yes, you have to. And a big part of, as you think about... We have big buckets: healthcare, business services, and industrials. The activity that the teams perform in terms of figuring out where we want to invest capital on behalf of our pensioners is a process, right? Part of that process is you can have a great investment thesis, but if there are no assets for sale, the effort is not worth the effort. 

Therefore, we make sure we find areas where there's lots of activity and assets that are coming up for sale. We would never buy an asset where the management team didn't want to be bought, and I think that we need to be very clear about that. We are not the LBO, the old buyout titans. We're looking for management teams that we can partner with, grow with, and build the business to be better than it currently is today. 

Jackie DeSouza: Right, that sounds fascinating. And so you have a much bigger team with 60 staff who have to research all these businesses and find them, as you mentioned, work with them, improve them, so that they can pay the pensions for the long term or generate those returns to pay the pensions for the long terms. 

Eric Haley: Correct. 

Jackie DeSouza: Right. So now, for both of you, your investment teams aren't dealing directly with the members. I work on the pension side, and we tend to interact directly with the members through our contact center, our training staff, etc. So, how do you keep the work you're doing connected to the people that we serve as OMERS and the real contributions that your teams make to the OMERS Fund? Maybe Prabha, if you could go first. 

Prabha Ram: So, the pension members are our purpose. Having worked for a fee in this business and now working for pension members, there is a big difference. They are the "why" in why we do what we do. The leadership at OMERS Oxford really hones in on this all the time. Internally, we call it the pension promise. It's an incredible privilege and honor, and it's a very big responsibility. We take it very seriously as well. 

Now, a lot of our Ontario-based employees are OMERS pension members themselves, that's number one. Many of them have family members that are pension members, and some are even pension recipients at this point. For me personally, my own mother, although not a part of this system, is a teacher who receives a pension. As she ages, the financial security, independence, and dignity that it provides her is very empowering for me.   

We are always aware and tuned into this purpose because the organization reminds us all the time. It is a true purpose. It's tough to quantify, but I feel like you will see it in the investment performance over time. 

Jackie DeSouza: Yeah, absolutely. And I hear that all the time from people across the company, and they talk about that pension promise, which basically means, for our members who may not know, that we will pay your pension for life, and we are here for the long term at OMERS. So thank you for that, Prabha. And I guess for you, Eric, how do you make this real for your staff, that they are actually earning returns to support our members? 

Eric Haley: Yeah, I think... As I think about our team and the culture we've built, which we have a tremendous amount of pride around, a lot of it is because of the purpose. You hear that a lot from the people in the team. And I will tell you, when we are out there, it's a competitive world we're in. We compete against all the general partners out there. When we talk about ourselves and differentiate it, it's long-term, patient, flexible capital. Those are three things we benefit from because we are a pension fund; we don't have a fund life. 

But, more importantly, when we start talking about the pensioners and who we represent, that really resonates with management teams. We use that in our pitch to basically sell people on why they should partner with us, and I also think it comes out in our culture of who we are and people want to partner with us. We're good, loyal, caring, smart—like the whole story works out really well. 

Every investment we make, we go and we talk to the management team, as well as all the employees. Just in North America, we have over 100,000 employees. We talk about the pensioners and who we represent. I can't tell you how many times after, we have people coming up and saying, "I had no idea that private equity could be this," because private equity gets painted with a broad brush. There are certain scenarios, but they are nowhere near what folks would suggest they are in terms of, not the evil empire but like just cost-cutting and all that. We're not that at all.  When they hear about us representing the pensioners of Ontario, it really resonates and differentiates us with just the people on the ground. 

Jackie DeSouza: Yeah, no, that's great. It's so heartening to hear that the other sides of the business, besides just the Pensions Team that I'm on, think about our members, think about our employers, think about our stakeholders. And I know you have lots of other stakeholders as well. So, if we can get a little more broad here, I wanted to take a step back and talk about OMERS investment strategy.  

Prabha, I've heard you say that your team is just one part of something bigger, that we're one instrument in a broader symphony, which is very poetic and lovely. Can you talk about how all the different investment teams work together toward that common goal? 

Prabha Ram: We started with this, Jackie, right? So each of us represents an asset class. We have public investments in public markets, we have investments in private markets, we own real estate, and we invest behind infrastructure assets. Our Chief Investment Officer, Ralph Berg, I think of him as the symphony composer and producer.  

So, if you think of a symphony, it consists of several instruments. There are violinists, there are percussionists, and there are wind instruments. However, as the audience member, you only hear one music, a harmonious music. You appreciate the complexity, but you just hear the one music. His job, really, is to produce the returns that get the pensions paid every year. You set aside cash to do that, but also put away returns with minimal risk. So, pensions can be paid well into the future, well beyond our lifetimes with OMERS. And so as he does that, what we want the members to perceive is hopefully this harmonious symphony because we are all pulling in the same direction towards our purpose, which is the pensioners. 

Jackie DeSouza: That's a really great analogy, I love that. And I'm sure Ralph would like to know that he's being called a conductor of an orchestra, which is great. So, Eric, I have a similar question for you. Can you talk a little bit about why diversification is so important for investment strategy? 

Eric Haley: On the diversification front, I think we have the beauty, as Prabha highlighted, of many different areas of expertise, whether it be capital markets, infrastructure, real estate, private debt, private equity, growth equity, or ventures. Each of them has relative attractiveness, relative risk, and liquidity and illiquidity. 

You've got the Capital Markets team, which represents about half of our balance sheet. This is the most liquid asset class out there, versus real estate, infrastructure, and private equity, which tend to be less liquid. These asset classes offer highly attractive returns, but you tend to be investing capital today to get it back in five, six, or seven years. Sometimes it happens earlier, but in the current marketplace, it's likely to happen later. However, this doesn't affect the returns; it's just the nature of the marketplace right now. 

Then there are also various industries. Just looking at private equity alone, we have healthcare, business services, and industrials. We do some software as well, and we would like to do more there, but it's expensive. So, we think about industry diversification. We also have business model diversification. Some businesses have recurring revenue for three years, while others are more transactional.   

We consider various models, industries, and geographies. We are in London, as well as in Singapore and here in North America, with North America being the biggest piece of our portfolio at about 70%. We think across all these dimensions and manage our portfolio within private equity accordingly. I think Ralph has the job of managing all of the asset classes and figuring out liquidity, illiquidity, geography risk, industry risk, and so forth. He has a whole team around him that does a really nice job of managing that. 

Jackie DeSouza: And when you refer to liquidity and illiquidity, in case our members don't understand what that means, so liquidity is you can sell a company fairly quickly 

Eric Haley: Correct.  

Jackie DeSouza: And get the cash returns.  

Eric Haley: When you own a stock, you could sell it today, tomorrow, and get money back. If you own equity in a private equity firm and decide today you want to sell, it will take you 6, 12, or 18 months, depending on how you're exiting—whether it's strategic, with another sponsor, or going public. 

Jackie DeSouza: Eric, building off that, what lessons have we learned from disruptions like the 2008 financial crisis or the most recent global pandemic? 

Eric Haley: I would say if I looked at 2008, when I wasn't here but I was in the private equity business, 2008 actually created a lot of opportunities. If I think about OMERS Private Equity, prior to 2008, a big chunk of our money was in funds. That crisis created a fantastic opportunity. The lesson there, I think, is never let a crisis go to waste. The returns have been excellent for OMERS and other folks who were more aggressive in the '08-'09 timeframe. 

Having gone through that, too, there was the flip side of when you had portfolio companies and you were in a crisis like in '08-'09, it was scary. If you had to refinance your debt in '08, it was almost impossible to do. When I look at the most recent crisis, that was one of the scariest moments in my career because you were staring at... Some of our businesses stopped doing business, and we were literally spending Monday and Tuesday going through all of our portfolio companies, getting feedback from all our management teams, understanding what the cash flows looked like, and how much money we were going to have to put in. At one point, the number was pretty large. Then all of a sudden, the market shifted, and we didn't have to put any money into any one of our portfolio companies.  

So it turned out okay, but I've got to tell you, the first 30 days were really scary. A tremendous amount of learnings came from that. When you think about our junior staff, even myself, the levers you had to pull in those 30 days, and this is when you're an active investor, you can have influence and do that. We were able to do that, working as the Board with management teams to execute on making sure we limited the amount of capital we had to put into these businesses. It was a good exercise. 

Now, unlike '08, that crisis didn't create a ton of opportunities because as soon as the Feds started lowering interest rates down to zero, multiples and people looking to put capital to work went through the roof, and it was probably the most expensive market to put money to work. So, it was very interesting and very different compared to '08 versus the most recent COVID crisis. 

Jackie DeSouza: Yeah, I mean, it was such a crisis across the board. Even on the pensions side, we had to have a completely new way of doing business. Everything went digital as quickly as possible, including all the staff for our company and other companies around the world who were used to coming into an office every day. And that's completely disrupted the entire workplace model as well. So, yeah, very, very interesting. I can imagine how scary it would've been from an investment perspective, knowing that you still have to generate those returns. 

Eric Haley: Yep. 

Jackie DeSouza: And like you said, office buildings didn't have anybody in them. 

Eric Haley: Correct, yep. 

Jackie DeSouza: And we have investments in office space as well. So, many companies had to adapt during the pandemic. Can you give us an example of maybe one of the companies in your portfolio that sort of weathered the storm of the pandemic and then succeeded at the end? 

Eric Haley: Yeah, and I would say it was, across the board, a success story. So, I don't want to paint the brush of like we only have one, but I'll give you an example of two. We had one, a vet business. As soon as COVID hit, people couldn't bring their pets into the vet's offices. We had to adapt. It was scary for the first two weeks, trying to figure that out and what might happen. Two things happened. We adjusted and had drop-off centers outside of our facility so that people could bring their pets, and then they'd be brought in by the doctors and nurses who were willing to work together, just like hospital employees. Additionally, there was the pet effect during COVID, where a lot more people got pets and needed shots. This demand creation was unexpected, and that business ended up doing very well throughout. 

We have another company that manages catastrophic claims on behalf of workers' comp. When people aren't working, it has a really significant effect. Surprisingly, that business didn't drop one bit throughout COVID. If you had asked me to bet on which one was going to have the most impact, I would have said that one. It worked right through the pandemic, perhaps a testament to the everyday workers dealing with workers' comp, who continued to work unlike people in office buildings. 

Jackie DeSouza: Wow, that's exciting. And the pet story, I think a lot of people can relate to, because I certainly saw a lot more dogs in our neighborhood, and some strange animals too because there weren't cars driving around. So, we saw coyotes and foxes. Lots of animals just wandering the neighborhood, pretty close to downtown as well. So, thank you for that story. I think it's really helpful to know that we've got these investment teams that are really looking out for all of these investments and returns. 

So Prabha, as you know, our retirement landscape is changing. People are living longer, working longer, and retiring later. How does your team think about that changing landscape and your part in it in terms of serving our members? 

Prabha Ram: So, our business, we are small owners in businesses, so the bar has gone higher in terms of the durability of the businesses that we look at. We want them to have competitive advantages that are sustainable for a very long period in the future. But the reason I said the bar has gone higher is because we test our theses all the time and we debate them internally as well. When the thesis breaks down and the durability is no longer there, then we have to adapt as well. 

The second thing is a lot of us are dealing with a very specific point in the market with high interest rates and very sticky inflation. It's a first for several of us in our careers, but what has been very refreshing is that the businesses that we are interested in, the durable businesses, find a way. They are able to take that extra cost in their business and price appropriately, preserving their margins. Or they are able to add so much more value to their shareholders that they do even better than they did in a period when interest rates were very benign. 

We want to invest in those businesses, but definitely, the bar has gone higher because we are thinking about our members and the fact that what they pay into the pension has to grow that much more so we can pay them for a longer duration of time. We are very conscious of that. The durability of our businesses reflects that view all the time, and that's what we are testing against, as well as debating within the team. 

Jackie DeSouza: Yeah, thank you for that very detailed response. So now, I'd like to just understand who the two of you are a little bit more and how you got into this business. So Eric, you told us you were born in Montreal, so maybe tell us, did you picture as a young person attending university or even high school that you would be in this type of business investing for a pension plan? 

Eric Haley:  No. Well, I never thought, I mean, I didn't... My dad was an engineer, and I had no one in my life who would have led me in this direction. It was more circumstance. I went to school knowing I wanted to get into business. How we define business, I didn't know. I wasn't one of those kids who went in and said, "I wanted to be a stockbroker." I was a math and econ major. I knew I wanted to make money; I was a financial aid kid, and I was coming out with a lot of debt. 

I watched the gentlemen who were older than me and my classmates go through the process of applying for investment banking. I really watched them and followed them, ending up at Morgan Stanley Investment Banking. For me, I really thought that being an investor was what I enjoyed. Personally, it's investing and working with people. I had an opportunity to work at a hedge fund or go work at a private equity firm. The private equity firm, for me, was about investing but also helping management teams build great businesses. That was really attractive to me, and that's how I got into it. It's been fantastic since I joined here, between the people I work with, the management teams, and the resources we have. We can be competitive with all the top players in the market, and yeah, it's been great. 

Jackie DeSouza: That's great. Well, we're lucky to have you, and that's an inspiring story, going from receiving financial aid in university to now becoming an investor for OMERS. So, thank you. 

Eric Haley: Yes, it's been great. 

Jackie DeSouza: And Prabha, for you, I looked you up on LinkedIn and saw that you were a computer science major. So how did you make that switch from computer science into the investment world? 

Prabha Ram: How much time do we have, Jackie? This one was a lot of twists and turns as well. I am a trained engineer. I have a master's in computer science. I was working at Symantec in cybersecurity when I went to Wharton to do my MBA. At the time, I was recruited by Merrill Lynch to assist the equity research analyst covering software. My training as an engineer—engineering is about problem solving, seeing those dots, and connecting those dots. Just by accident, I realized I could be effective covering multiple sectors, which is what portfolio managers do.  

We have amazing industry experts that tell us the best in their business, but our job is to then look at the best of the best in all these sectors and say which ones fit our portfolio, fit our risk and return parameters. It was all great training for that. I had a stint at American Century Investments, which is the mutual fund business, for 15 years, and then OMERS. It's been a short two years, but it feels like a lot more. Incredible people all around, not just within the team but across the team. We have amazing chemistry on the investment teams. As I said, we can be lifecycle investors, and I feel very empowered to go knock on Eric's door to ask him about a business that we are looking at a scaled version of, but they might have a single piece of the business in the portfolio that they can educate us about. 

Jackie DeSouza: Right, and it sounds like you're using those skills that you studied being an engineer to build and computer science as well in the work that you're doing now. 

Prabha Ram: Very much so. 

Jackie DeSouza: So, it sounds fascinating. Well, Eric and Prabha, thank you so much for joining us today. It's been a pleasure talking to you and learning about all the important work you do on behalf of OMERS members. 

Prabha Ram: Thank you, Jackie. 

Eric Haley: Thank you.