Canada’s OMERS has warned that investors need to temper their expectations regarding the performance of more recent private equity vintages, as the favourable environment of high valuation multiples and low interest rates that spurred over a decade of superior returns in the asset class begins to fade.
But the maths around another investor favourite, private credit, still “looks reasonable” despite tightening spreads, according to executive vice president and head of Asia Pacific for OMERS, Ashish Goyal.
The comments offer a glimpse into how the C$138 billion ($100 billion) fund is thinking about the two private asset classes. OMERS has one of the highest unlisted market allocations among global pension funds at 69 per cent, with 19 per cent in private equity and 13 per cent in private credit. The remainder consists of infrastructure (22 per cent) and real estate (15 per cent) according to a 2025 mid-year disclosure.
“I think certain [private equity] vintages, which were recently invested in the last four or five years, might really struggle to deliver the kind of returns they had promised,” Goyal said at an event in Singapore hosted by CGS International.
Two decades ago, private equity investors focused on value creation in investee companies and reaped the rewards from it, but when interest rates plummeted post-GFC, the game changed, he said.
“One [change] is valuations got lifted. So even if you added no value, you bought [a company] at maybe 10x [valuation multiples] at a time, sold it at 14x – and you look very clever. But you have added no value. You turbocharge that when rates really dropped and increase your leverage levels as well,” he said.
“Compounding that, there were certain vintages post GFC which made very high returns, not necessarily because value was added, but because multiples went up and there was a lot of leverage. That is now unwinding.”
Private equity firms are under pressure to return investor capital amid a depressed deal-making environment, which inspired the rise of creative structures like continuation vehicles that allow managers to hold onto their assets longer and seek higher valuations. Goyal expects the challenging environment to remain a while longer.
“I don’t think the marks are there… and the leverage is obviously unwinding because it’s not sustainable for many of the businesses to carry the books they were carrying when rates have gone up a lot,” he said.
“[For more recent vintages] if they… buy well and are not pressurised into buying because they collected the [investors’] money, they have a chance of doing reasonably well, but you won’t see those kinds of very high returns you saw in particular vintages from 15 years ago.”
In the six months ended June 30, private credit returned 2.7 per cent for OMERS while private equity had a 1.3 per cent loss, impacted by low valuations and, to some extent, fluctuations in the US dollar.
In private credit, it is “certainly a riskier asset than it used to be” as covenants become diluted and leverage multiples shot up, Goyal said, but added that there are still positive features such as its floating-rate nature, which means investors are taking credit risk more than rate risk.
“When we do it [private credit], the main thing we watch out for is… we want the covenants to be very tight. Return of capital is very important to us – return on capital we’ll worry about later, we want our money back to begin with.”
Deep markets
Weighing in on public markets and the question of geographical diversification, Ashish noted that there are five “deep markets” across the world where an investor of its scale can meaningfully allocate to: US, India, China, Europe and Japan (though to a lesser extent).
Within its investments, OMERS’s largest underlying exposure is to the US (55 per cent), followed by Europe (18 per cent), Canada (16 per cent) and Asia Pacific plus the rest of the world (11 per cent).
In China, Goyal predicted the difficult journey of rebalancing its economic drivers from capital expenditure to consumption will remain for a while longer, and the country needs to fundamentally address the issue of overcapacity.
“You’ve seen two, three years of a deflationary environment in China. [If it] continues for some more time, it might become very much like Japan, where it’s so deep seated that you can’t shake the consumer out of that mindset,” he said.
“I’m not seeing enough by the leadership to change that direction, which makes China a cyclical buy.
“You can trade China. You can invest in it. It’s already done very well over the last 12 months from a very low level. But can it be a structural buy? Can it stand next to India and the US as something that you want to own for the next 10 years? I’m not so sure.”
Japan may present interesting opportunities as a result of recent corporate governance reforms, including improvements like the reduction in cross-shareholdings. “This could be a multi-year shift – a positive shift – and that might create genuine value in Japan,” Goyal said.
Other markets in the region, though, might not be so easy for OMERS to tap in. Taiwan and Korea have narrower markets – semiconductor manufacturer TSMC accounts for 55.1 per cent of the MSCI Taiwan Index, while the Korean market is driven by top exporters like Samsung and SK Hynix.
The ASEAN equity market lacks scale. The collective market capitalisation of the Southeastern Asian listed companies reached $3 trillion as at December 2024, according to data from ASEAN Exchanges, which is less than Nvidia’s value by itself ($4.4 trillion).
“Europe, in its own kind of commingled way, has something ASEAN doesn’t. ASEAN is very, very small, and for investors like us, where our minimum equity requirements are quite high, it’s very difficult to invest in,” he said.
