When work begins on a new, 42-mile commuter rail system here this year, it will also be a groundbreaking moment for Michael Sabia, head of Quebec’s largest pension fund.First, let me thank Jacquie McNish for writing this article. Jacquie is a first-rate reporter and now a correspondent for the Wall Street Journal in Canada. She also co-authored the book, The Third Rail, along with OTPP's former CEO, Jim Leech, who I had a great conversation with last month on pensions and Canada's new Infrastructure Bank.
Not only is his fund, Caisse de dépôt & placement du Québec, financing 51% of the 6 billion Canadian dollar (US$4.8 billion) project, but Mr. Sabia has structured the deal so it will manage the building and operation too. Even as many pension funds are getting bolder about chasing higher returns, it’s a high-stakes bet that exposes Caisse to the operating and financial risks of Montreal’s biggest transit project in half a century.
“We’re an organization that wants to build,” said the 64-year-old Mr. Sabia in an interview at the sprawling glass headquarters of the pension fund, which manages C$286.5 billion of assets.
Montreal’s new transit system, which is set to begin operating at the end of 2020, “is going to show the world that a pension fund can do this,” he said.
It’s the latest example of Mr. Sabia’s aggressive, hands-on brand of managing investments at the fund. Even in Canada, where pension funds have a history of activism, he is known for deep involvement in the companies in which Caisse takes a stake, leading a shareholder push to limit the boardroom influence of Bombardier Inc.’s founding family and also ensuring Canadian jobs were preserved after Lowe’s Co s. takeover last year of Canadian home-improvement chain Rona Inc.
Now, under the Montreal rail deal with the Quebec and Canadian governments, he will deploy about 400 Caisse employees and contract workers to construct and operate an electric light rail in exchange for fees based on the number of commuters. Unlike most pension funds, which invest in infrastructure through bonds or specialized funds, Caisse under Mr. Sabia is seeking to grab a bigger share of public-works projects by offering a suite of financial, construction and operating services.
“What Michael is doing is way outside the mainstream of pension investing,” says Jim Leech, former chief executive of Canadian pension giant Ontario Teachers’ Pension Plan. While a number of Canada’s big pension funds have been major investors to own and upgrade airports and ports, Mr. Leech says, “none are building from the ground up.”
The project has also grabbed the attention of U.S. officials from cash-strapped states who have noted that the Quebec government had to put up only C$1.3 billion—just about 20% of the project. Mr. Sabia has met with half a dozen U.S. governors in the past year to explain the train deal and promote Caisse’s model for U.S. public works.
Mr. Sabia said his unusual approaches reflect the goals of Caisse, which was founded in 1965 under a dual mandate to increase returns and enhance the Quebec economy. Mr. Sabia has sought to invest in projects such as Montreal’s transit system to “reinject” more prosperity in local communities.
“I really believe in this deeply,” said Mr. Sabia, as he raked his hand through a thicket of silver hair. Too many businesses, he said, “have not thought carefully enough about the social consequences” of investing.
His interest in such social consequences was influenced by his late mother, Laura Sabia, a prominent champion of women’s rights and a city councilor in his hometown of St. Catherines, Ontario. Her advocacy taught him “about the importance of being sensitive to and involved in public issues,” he said.
Before Mr. Sabia started in 2009, Caisse had long been seen by critics as the financial arm of Quebec governments, which on occasion pressured the fund to prop up struggling local businesses or block takeovers by outsiders. But when he was hired, he had unusual leverage: Caisse had recently announced a C$40 billion decline in net assets.
The “searing event,” said Mr. Sabia, was such a threat to its ability to pay pensions that he was able to push for more independence to ensure “this can never happen again.”
Now, he argues a more effective strategy for improving the fortunes of Quebec businesses and communities is to support global expansion, even if it leads to foreign takeovers.
But Mr. Sabia has made clear any such takeovers will be on Quebec-friendly terms. When a group led by TPG Capital made a bid in 2015 for Montreal’s iconic Cirque du Soleil, in which Caisse was an investor, Mr. Sabia personally negotiated long-term local job and head-office protections with the private-equity fund’s co-founder James Coulter.
Mr. Sabia’s path to the top of Canada’s second-largest pension fund is as unorthodox as some of his investment moves.
His career began in Canada’s federal civil service, where he oversaw a major overhaul of the national tax system. He then landed a senior executive assignment to help turn around the Canadian National Railway Co. Later, he was named CEO of Canada’s largest telecommunications company, BCE Inc.
When the Quebec government announced his appointment as the fund’s first non-Quebec CEO who had no investment experience, local media and politicians were so outraged that one Quebec columnist described the controversy as a “full-fledged political scandal.”
But the fund’s assets have more than doubled since it reported net assets of C$131.6 billion in 2009. It has delivered an annualized return of 10.6% in the past five years.
When the Montreal transit system is completed, Mr. Sabia said he would promote it as “proof of concept” that his pension fund can compete for bigger roles in some of the $1 trillion infrastructure projects promised in the U.S. by President Donald Trump.
“This is how we can differentiate ourselves,” he said.
Corrections & Amplifications
Caisse de depot et placement du Quebec is Canada’s second largest pension fund by net assets. An earlier version of this article incorrectly said it is the third largest. (Oct. 6, 2017)
Jacquie's article is great except for some minor quips. For example, large Canadian pensions also take significant equity stakes in brownfield infrastructure projects (not just bonds) and unlike private equity, they go "direct" when it comes to infrastructure, avoiding fees to third-party specialized infrastructure funds altogether.
She cites Jim Leech who rightly notes: “What Michael is doing is way outside the mainstream of pension investing,”
In fact, there is a long-standing tradition in Canada's powerful pension world to always look at Ontario Teachers' Pension Plan when it comes to "truly innovative, cutting-edge" investments.
Not in infrastructure. With this Réseau électrique métropolitain (REM) project, the Caisse's infrastructure group, CDPQ Infra led by Macky Tall, has leapfrogged in front of pretty much every large Canadian and global infrastructure investor by becoming a first-mover on a greenfield project which most pensions have hitherto avoided.
Interestingly, Macky Tall figured prominently among the Soveign Wealth Fund Institute's 2017 list of the Public Investor 100, coming in at number 8. And for good reason, he and his team are working on a groundbreaking project, one that investors all over the world will be scrutinizing very closely.
I don't know much else about Macky except that he's very qualified and a very competent and nice leader. He's also the only black EVP at the Caisse and the only black senior pension fund manager in all of Canada (click on image):
I mention this because I'm a huge proponent of diversity in the workplace. Not diversity in terms of spewing hot air about how important diversity is and making a big splash about sponsoring women to move up the corporate ladder, but diversity in terms of actions, making sure you practice diversity in the workplace at all levels of your organization.
Macky Tall didn't get to where he is because of the color of his skin but I for one think it's high time a lot of Canada's large pensions and other public and private organizations stop talking up diversity and start acting on diversity because as a fluently trilingual Greek-Canadian, I have no qualms telling you we're pathetic up here when it comes to diversity in the workplace (all talk, no action, period).
Now, in infrastructure, Canada's large pensions are very well known. There are great infrastructure leaders all over. In June, I discussed OTPP's new infrastructure approach, going over what Andrew Claerhout and his team are doing.
In that comment, I stated the following:
I just finished covering the International Pension Conference of Montreal and PSP's fiscal 2017 results where I noted that PSP's CEO André Bourbonnais is concerned about investor complacency and rightfully warned institutional investors are underestimating valuation and regulatory risks of infrastructure, mistakenly looking at these investments as a substitute for bonds.Leo de Bever knows Michael Sabia well. They often meet when he comes to town. There is a mutual respect and why not, Leo is one of the smartest people in Pension Land and has tremendous experience and knowledge.
In a private conversation with me at last year's pension conference, Leo de Bever, AIMCo's former CEO, told me he thought some of the infrastructure deals were being priced at "insane levels". I can't tell you which deals he mentioned (will let you guess), but he did add this: "what the Caisse is doing with this greenfield infrastructure project is truly innovative and can pay off in a huge way if they get it right."
I agree. There is no large pension in the world which is doing anything close to what the Caisse is doing in terms of a purely direct major greenfield infrastructure project where it controls everything from A to Z.
In order to do this project, CDPQ Infra went out and recruited people with the requisite skill-sets, people with operational experience developing and managing mammoth greenfield projects (not just MBAs and dealmakers but engineers with MBAs who worked at large construction engineering companies like SNC Lavalin and elsewhere).
I only met Michael Sabia once. Actually twice if you count the time he walked right in front of me at the Montreal airport as I was waiting to pick up my dad. I emailed him to tell him I just saw him but didn't have the time to talk to him and he was nice enough to email me back saying "it's too bad, you should have said hello".
The time I did meet Michael was at CBC's offices in Montreal where Amanda Lang interviewed me from Toronto for her show where she was discussing a push for regulators to regulate large public pensions above and beyond what they already do. Michael thought it was a bad idea and so did I.
We met briefly beforehand where he told me "Europe was a mess" and how they liked Mexico over the long run. He was nice but there was this annoying attaché hovering over us as we chatted waiting to be escorted to our separate television studio rooms to do our interviews.
Michael strikes me as a very hard-working, intelligent, intense and somewhat arrogant but equally humble guy. I don't mean that in a bad way, it comes with the territory as being the CEO of the Caisse makes him very important and allows him to hobnob with the Desmarais family and other elites in Quebec and elsewhere in Canada and the US.
He also has political aspirations but that is my suspicion. Look at his background and look at his role models growing up. His mother was a city councilor who championed women's rights, and his wife, Hilary Pearson, is the granddaughter of former Prime Minister Lester Pearson. In 2016, he was appointed as a Officer of the Order of Canada.
Say what you want about Michael Sabia but he worked hard to get to where he is, first working at the federal public civil service where he assumed progressively more responsible positions before moving over to the private sector as the CFO of Canadian National Railways (with the help of Paul Tellier) and then over to Bell Canada where he assumed the role of CEO back in 2002, taking over from Jean Monty who now sits on the board of Bombardier (and defended controversial compensation doled out to senior execs at that company, which is now the least of its problems).
Sabia's background allowed him to think differently in terms of how to position the Caisse over the long run and to take important long-term risks that others wouldn't dare even discuss. The Caisse's Réseau électrique métropolitain (REM) project is literally "Sabia's baby" which is why he asked for a second term at the Caisse (and easily got it) to see its completion.
When he took over the Caisse, the French separatists weren't too happy but neither were other Québécois elites who thought the Caisse needs to be run by a "québécois de souche" (native, French-speaking Quebecker).
It was all nonsense and Michael Sabia, le Québécois, would have none of it. He took on my former PSP colleague, Jean-Martin Aussant who was then a PQ MNA, in a heated exchange where he defended his roots:
"Almost 100 years ago, my grandfather arrived here in Montreal with nothing, nothing, nothing in his hands. Why did he stay here? Because he was convinced that Quebec is an open society," Mr. Sabia said. "I grew up with this perception. I am not going to accept your position. I have an understanding of Quebec and I chose to work here - over a lot of other opportunities in Asia and in the United States - to render service to Quebec."To be fair, I like Jean-Martin Aussant, think he makes a much better politician than he ever did as a pension fund manager, but I too took issue with his line of questioning back then.
Many years after la Révolution tranquille (the Quiet Revolution), Quebec has a serious reverse racism problem which is ingrained in its large public and private organizations. Many anglophones and ethnics have given up hope living here and the ones that stayed are pushing their children to leave this province or stay and face reverse discrimination.
I'm not going to mince my words here, and I can look in the eyes of Louis Vachon, Guy Cormier, André Bourbonnais and many other French-Canadian leaders who sit on the board of Finance Montréal or le Cercle Finance du Québec and tell them this province is going down the tubes in terms of diversity in the workplace and they're either going to take concrete actions to promote it at all levels of their organization or Quebec as we know it is doomed in the future.
By the way, I would say the exact same thing to Premier Philippe Couillard and Prime Minister Justin Trudeau who has no clue what a mafia the federal public service has become in terms of getting in and how it regularly ignores important diversity laws. When our own public institutions aren't practicing diversity in the workplace, it sets a terrible example for private organizations.
In particular, and let me be crystal clear here, the way Canada's large public and private organizations treat people with disabilities is a national disgrace and travesty.
I blame our leaders at public and private organizations for this national disgrace. They make every excuse in the book for not hiring competent people with disabilities at all levels of their organization but at the end of the day, they know I'm right to criticize them openly and publicly and I challenge them to show me the numbers to prove I'm wrong.
Anyway, don't get me started on that topic, discrimination in all its ugly forms makes my blood boil, just like it made Michael Sabia's blood boil when he had to defend his québécois roots to the likes of Jean-Martin Aussant years ago.
As someone who was diagnosed with Multiple Sclerosis 20 years ago and lives discrimination I will do everything in my power to expose the blight of people with disabilities (I'm actually one of the lucky ones, doing relatively well, but have seen way too much injustice to keep my mouth shut on this national travesty).
Anyway, Sabia isn't your typical pension fund manager but that has worked in his favor and to the Caisse's favor. After assuming the role of CEO, he tightened up risk management in Public Markets, focusing on buying solid companies all over the world with solid cash flows and he did the same in Private Markets where he focused mostly on Infrastructure because Real Estate and Private Equity were already ramped up and doing very well.
My only criticism of Michael is he works like an animal (I've gotten emails from him at 11 pm and beyond) and expects a lot from his employees, sometimes way too much. He needs to get out of the 11th floor more often, come down to talk to his teams and employees and just relax a little even though Quebec's merciless media is looking for him to screw up "bigly" (which he hasn't, quite the opposite, much to his critic's disappointment).
What else? Michael is definitely one of Canada's pension overlords now and is also piling on the leverage (not as much as others) but he hasn't lived through the Mother-of-all bear markets yet and I doubt he really understands the huge downside risks mounting in these prickly markets (I'll never forget a conversation I had with Gordon Fyfe in front of his house as he was mowing his lawn and stopped to talk to me in the summer of 2008. He looked white as a ghost and was living a nightmare at work back then as was Henri-Paul Rousseau, Sabia's predecessor).
In my opinion, to become a true pension fund manager or institutional money manager, you need to live the fear, stress and outright horror of an ugly bear market where asset prices plunge across public and private markets. And if you don't believe me, just ask Bob Bertram, OTPP's former CIO, who once candidly told me in a phone conversation: "We kept buying the dips in 2008 and kept getting slammed as prices fell to new lows. It was the worst experience of my career."
Below, take the time to watch a great discussion on lessons from the Canadian pension fund model which took place last year featuring OTPP's CEO Ron Mock and the Caisse's CEO, Michael Sabia.
Michael Sabia and Ron Mock aren't your typical pension fund managers -- and that's a good thing!
