July 22, 2013
Interviewed by: David Snow
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OMERS: Success Going Direct

Canadian pension OMERS is its own GP – and this applies to venture investing as well. For the past year-and-a-half, John Ruffolo, CEO of OMERS Ventures (the venture capital arm of the Ontario Municipal Employees Retirement System) has run a program that directly invests the pension fund’s capital in early and growth-stage situations. In an exclusive interview, Ruffolo gives an update on how the DIY project has gone so for, and tells why “we constantly get questions from other sovereign wealth and pension funds to understand how is it that [we’ve] actually been able to really become a direct asset manager.”

Canadian pension OMERS is its own GP – and this applies to venture investing as well. For the past year-and-a-half, John Ruffolo, CEO of OMERS Ventures (the venture capital arm of the Ontario Municipal Employees Retirement System) has run a program that directly invests the pension fund’s capital in early and growth-stage situations. In an exclusive interview, Ruffolo gives an update on how the DIY project has gone so for, and tells why “we constantly get questions from other sovereign wealth and pension funds to understand how is it that [we’ve] actually been able to really become a direct asset manager.”

OMERS Ventures: Lifecycle Investing

A Privcap conversation with John Ruffolo of OMERS Ventures

Why did OMERS launch a venture capital arm?

So in 2008, OMERS had decided that they were no longer going to be investors largely in funds any longer. And it was really based on OMERS’ DNA of direct investing. Really for many years, OMERS only directly invested in infrastructure, in real estate, so that DNA already existed there. And they decided to go direct in private equity as well, as opposed to being either a passive investor or a co-investor. And at the same time, they really contemplated what they should do from a venture capital perspective. And they mulled over for a couple years to better understand the landscape. In 2011, OMERS decided that consistent with the DNA of OMERS to build a captive venture capital arm called OMERS Ventures.

How has Canada’s regulatory framework encouraged pensions to act as direct investors?

What people don’t really realize, I actually didn’t realize it until I joined OMERS, how advanced the Canadian pension funds, particularly the larger Canadian pension funds, are due to the more significant resources. How Canadian regulatory and taxation changes really small ones over a course of 20 years, have led to the ability for Canadian pension funds to really act as direct investors. You compare that to say the United States where they’re very much on the very passive scale.

And when you go throughout the world, you have a mix of passive investors or co-investors. But Canada is renowned globally as having a unique model. And a lot of it had to do with the size of the pension funds and the pension funds looking at maximizing their investment returns outside of Canadian borders. And a lot of these changes have enabled them to do that. And to this day, we constantly get questions from other sovereign wealth and pension funds to understand how is it that you’ve actually been able to really become a direct asset manager.

OMERS Ventures launched 16 months ago. What are your perspectives so far on operating as both a GP and LP?

Well, I’ll give you kind of the internal comment and then an external one. From an internal perspective, being both the GP and LP of a fund has some very unique advantages. One of the concerns that we have that’s shared by a number of other capital pools is the potential for misalignment between LP and GP.

We remove that away and as well, the whole concept of having a long-term patient capital pool works very favorably to entrepreneurs. And I think what’s a misconception is the view that you can invest in the company and a few years later you can harvest your investment and exit out. The best returns, based on our experience, start to occur after the tenth year of a business being built.

So when you start looking at that, it starts to put pressure on the GP-LP model and when you eliminate that dynamic, it allows you to be as patient as you need to be. Sometimes you have to be careful that you’re not too patient but allows you that flexibility, so that if there is great supply of opportunities in the market, you can hit the investments pretty hard. If you do not like what you’re seeing in the market, you can just scale back and sit back and there’s no pressure either way. Today, and it was really due to fortuitous timing and no particular remarkable insight from our perspective, when we really launched for the public the number of opportunities available strictly in Canada has exceeded our expectations. And I would say to you the one surprise is the number of great later stage opportunities of companies that are very significant in size, profitable, that perhaps have been undercapitalized for many years and they learned to boot-strap themselves. And we’ve been very, very aggressive in particular on that later stage.

Can you describe the OMERS Ventures approach toward value creation?

So the core of our investing thesis is to be a lifecycle investor. So what that really means is we will come right at the earliest stage so we will be seed investors and follow through throughout the lifecycle of business and be there as the business grows, right to their late stage. So right now we’ve been operating for about 16 months. We have 16 investments, seven seed investments.  Five I would call early growth investments, so there’s some revenues and then four later stage opportunities. And it’s that flexibility that allows us to, in our view, select the best companies and not necessarily being forced to pigeon-hole ourselves in a particular segment of the lifecycle of the business, but rather identify the best businesses no matter where they are in their lifecycle.

Venture capital in Canada has come a long way – where are the remaining gaps in the industry?

As part of the thesis, you know once OMERS decided that being a fund investor in venture capital wasn’t really making sense for them, they spent a couple of years looking at the Canadian landscape and looking to see where were the holes in the financing of a technology business. And pretty much when you take the full lifecycle of a business, there were holes throughout the entire chain. And our investment strategy was predicated on being an investor who can cover the entire chain.

I would say to you over the last 24 to 36 months, there has been a number of very positive improvements in the early stage of that chain, whether it be accelerators, incubators, micro-VC’s, angels, super angels, what have you. And it’s been absolutely fantastic. You know, is it perfect? Is it enough? Probably not but certainly way better. What I observed though, as you get further on in the lifecycle of the business and where the check sizes start to become 10, 20, $30 million, there still is a significant hole in Canada in addressing that area.

Is OMERS Ventures a geographically-focused fund?

We have no restrictions from a geographic perspective. So OMERS Ventures is a global fund. However, from a venture perspective, because of the level of activity that we expect to be involved with and we’re trying to really look at adding value, proximity from a geographic perspective does become an issue. So right now we’re really just focused in on the North American marketplace. However, I would call it phase one of our strategy was you’d better build your brand in Canada first because if you don’t “own Canada,” you own nothing.

So we wanted to do two things. Earn our privilege in Canada so that we can participate in the best deals in this country so spend a lot of our time here. And then pick a few themes in Canada where we can actually get known as a quality investor. And participate in a number of those financings with top-tier U.S. capital, with a view that with those relationships, we would see ourselves participating in top-tier deals in the United States. I would say for the foreseeable future, you will see the majority of our capital clearly always being in Canada because of the proximity issue and you’ll see a portion of our capital invested in U.S. companies for the foreseeable future.

What key factors do you consider before investing in a company?

One of our core founding principles is that the entrepreneur is our partner. And it’s more than just words so what we did is that when we built the team, we built our senior team with the view that they must have ran a business, whether a part or the entire business, and they must have been either an operator or a founder of that business. So that they can really feel the empathy of what that entrepreneur is going through, as opposed to providing advice really from afar. And it’s been very, very effective.

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