OMERS Plans to Establish $180 Million Venture Capital Fund

The Ontario Municipal Employees Retirement System (OMERS) is set to launch a venture capital arm that plans to commit $180-million in the next three years.

(October 4, 2011) — The Ontario Municipal Employees Retirement System (OMERS) is set to launch a $180-million venture capital fund, an out-of-character move by the more risk-averse Canadian scheme.

John Ruffolo, the chief executive officer of OMERS Ventures, told the Globe and Mail that he predicts that the pension can outperform traditional venture capital and private equity players focused in Canada and selected US cities. “It’s far more effective if you’re involved in your own backyard,” Ruffolo told the Business News Network. Sectors of interest for venture capital will include technology, media, telecommunications, clean technology and life sciences, with a focus on North America, the Canadian scheme noted.

“We believe our program for investing in venture capital will result in a win-win scenario,” said Jacques Demers, President and CEO of OMERS Strategic Investments (OSI) in a statement outlining the launch of OMERS’ venture capital investment arm. “Strong, long-term investments in this asset class will help us continue to deliver on the pension promise for our members, while also encouraging the development of a vibrant and successful Canadian knowledge economy.”

According to a statement from the Canadian pension, Canada’s venture capital industry has suffered from a lack of resources and funding since the technology boom and bust over 10 years ago. “This means many promising companies are unable to reach the next level of success,” the statement asserted. “The right combination of capital, mentoring and guidance enables strong, young companies to become even more successful,” Ruffolo said. “With our experienced investment team, accomplished advisory board and pool of patient, long-term capital, OMERS Ventures is an ideal partner.”

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Additionally, the fund has put together a board of advisers for the venture capital initiative that includes Jim Fletcher, the co-founder of Chrysalix Energy Venture Capital, billionaire entrepreneur Terry Matthews, the chairman of Mitel Networks Corp, and Canaccord Genuity Corp. chairman David Kassie.

Meanwhile, in the United States, venture capital performance has continued on a gradual upward trajectory as of the first quarter of 2011, according to a July study by Cambridge Associates. The firm found that as of March 31, the 10-year return was -0.1%, compared to a return of -2% as of Dec. 31 and -4.6% as of Sept. 30. The figures showed that the returns were fueled by the performance of venture capital investments over the past year, which had seen 18.5% returns as of March 31, compared to 13.5% as of Dec. 31 and 8.2% as of Sept. 30.

According to the consulting firm, the improvements were witnessed across all time horizons, with the exception of the 15-year numbers. “The quarter marks the second consecutive one in which there were double digit returns for the one-year horizon and modest improvements in the three-, five-, and ten-year performance numbers,” a release on the returns noted. Venture capital returns outperformed the public indices in the one-, five-, 15- and 20-year horizons.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Morgan Stanley has won the dismissal of a Virgin Islands government pension fund lawsuit accusing the bank of defrauding investors of $1.2 billion of risky mortgage debt that it expected to fail.

(October 3, 2011) — Morgan Stanley has won the dismissal of a Virgin Islands pension fund’s lawsuit over a collateralized debt obligation (CDO).

US District Judge Barbara Jones in Manhattan dismissed the investor complaint.

In 2009, the Employees’ Retirement System of the Government of the Virgin Islands claimed that the bank defrauded investors by collaborating with ratings companies to give the CDO an undeserved AAA rating while it was simultaneously short-selling nearly all of the assets underlying the notes. Bloomberg reported. The complaint alleged that the bank was therefore motivated to defraud investors with positive ratings, aware the CDO assets were suffering from an increase in delinquencies and were riskier than the ratings indicated.

Additionally, the lawsuit claimed that the CDOs were backed by securities issued by subprime lenders, including bankrupt New Century Financial Corp. and Option One Mortgage Corp.

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The lawsuit by the pension against Morgan Stanley is one of many examples of accusations against financial institutions following the 2008 economic crisis. Last year, the US Securities and Exchange Commission (SEC) accused Goldman Sachs of fraud in failing to disclose conflicts in mortgage securities, which they alleged cost investors more than $1 billion and fueled the worst financial crisis since the Great Depression.

The SEC’s complaint, filed in the US District Court for the Southern District of New York, stated that Goldman failed to disclose that one of its clients — Paulson & Co. — helped create and then bet against subprime mortgage securities that the New York-based firm sold to investors. The suit claimed that Paulson & Co., one of the world’s largest hedge funds run by the billionaire John Paulson, paid Goldman about $15 million for structuring the deals in 2007.

In July 2010, Goldman agreed to pay $550 million to settle charges by the SEC over the Abacus 2007-AC1 CDO.

More recently, the SEC announced in June that JP Morgan will pay $153 million to settle charges of allegedly selling $1.1 billion in mortgage-backed securities that were designed to fail. The US regulator asserted that as the housing market crumbled in March and April 2007, JP Morgan executives urged the marketing of Squared CDO 2007-1, a synthetic CDO linked to a collection of residential mortgages, without informing investors that a hedge fund — Magnetar Capital — helped select the assets in the CDO portfolio and had a short position in more than half of those assets. Consequently, the hedge fund was positioned to benefit if the CDO assets it was selecting for the portfolio defaulted.

“J.P Morgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests,” Robert Khuzami, the SEC’s director of the division of enforcement, said in a statement. “What JP Morgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection. With today’s settlement, harmed investors receive a full return of the losses they suffered.”

The SEC release stated: “The SEC alleges that by the time the deal closed in May 2007, Magnetar held a $600 million short position that dwarfed its $8.9 million long position. In an internal e-mail, a J.P. Morgan employee noted, ‘We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.'”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742