OMERS is having to hold complex discussions with some of the world’s largest institutional investors about whether they want to pump more equity into Thames Water, amid efforts by Ofwat to drum up extra cash to support the ailing water giant, sources familiar with the matter said.
As well as owning a direct stake in Thames Water, the Canadian pension fund also manages stakes in the water company owned by several large international institutional investors, sources said. The investors include the world’s largest pension fund, Japan’s Government Pension Investment Fund, according to two of the sources.
OMERS and these investors - which one of the sources described as partners of OMERS' - own a combined 31.7% stake in Thames Water, making them the largest single shareholder.
These investors are some but not all of around 15 limited partners in a USD 12.5bn co-investment vehicle managed by OMERS called the Global Strategic Investment Alliance (GSIA).
Given they are shareholders in Thames Water and also potentially have certain investment rights, OMERS is having to reach out to them to find if they wish to take part in a capital raise by Thames Water, sources said.
An OMERS spokesperson said, "We are not able to comment given our commitment to the confidentiality of our partners and other stakeholders.”
Thames Water’s shareholders are under some pressure to make clear whether they will throw in further cash into Thames. Ofwat’s chief executive, David Black, on Tuesday (4 July) told a House of Lords committee hearing that Thames Water needs billions of pounds more in cash, but that “investors have become more concerned about the successful turnaround of the company”.
But OMERS' talks with the investors might mean it takes longer to decide whether it can take part in the proposed Thames equity injection. One of the sources said that OMERS is having to “coordinate with lots of investors” linked to GSIA about the Thames Water capital raise.
Another source said, “Part of the challenge for OMERS is that it needs to go back to [some of] the investors in the GSIA to see if they will put in more money into a company that is not doing as they’d hoped it would do."
The Canadian pension fund has not said publicly whether it will commit extra capital to Thames, while the water giant’s second largest investor, Universities Superannuation Scheme, said on 30 June that it has given its backing to Thames water’s turnaround plans, per media reports.
Other LPs in GSIA include a consortium of Japanese companies and pension funds led by Mitsubishi Corporation, Japan's Pension Fund Association and the Development Bank of Japan, although it is not clear if they also have stakes in Thames Water.
One issue facing OMERS’ co-investors in Thames is that they might also see the value of their existing shares “diluted” if they don’t participate in the current equity raise discussions, sources said.
This is because they face a fall in the value of their existing investment, as the new capital raise is likely to be done at a discount to Thames’ previous value, the sources added.
Thames Water’s valuation is expected to have declined amid reports that the UK government and Ofwat have held talks about potentially placing the company into a special administration regime.
The sources likened the situation facing the LPs to a cram-down, in which an investor is forced into accepting undesirable terms in order to avoid diluting the value of their existing shares.
One investor with knowledge of Thames Water said, “OMERS needs to do the right thing. The right thing is to call every single one of your investors [in Thames Water] that you manage and say there might be a need for money and do you want to make a pro-rata investment [invest extra capital proportionate to their current shareholding].”
OMERS originally targeted to raise USD 20bn for the open-ended GSIA, but it closed in 2014 with around USD 12.6bn.
In 2020, OMERS Infrastructure sold a minority portion of its 15% equity stake in German wagon lessor VTG, in part to an LP in GSIA; while GSIA bought a minority stake in 2013 from OMERS in Midland Cogeneration Venture, the US’ largest natural gas-fired cogeneration facility.
Thames Water, Japan’s Government Pension Investment Fund, Japan's Pension Fund Association and the Development Bank of Japan declined to comment. Mitsubishi Corporation did not respond to a request for comment.