The Caisse de depot et placement du Quebec had a 4.2 per cent return on investment for the 2018 fiscal year, the lowest rate of return since 2011 – but higher and Quebec's baseline index of 2.4 percent.Let me begin my analysis by respectfully disagreeing with Michael Sabia on SNC. Any way you slice it, it's a dog's breakfast but the Caisse is a major investor and is stuck with it no matter what happens.
2018 was a difficult year, said Michael Sabia, president and CEO of the Caisse, adding that global equity markets had dropped for the first time in many years.
“We’re focusing on high-quality assets in infrastructure, in real estate, in private equity in our public equity investments -- always this emphasis on quality,” he said.
Since 2011, the Caisse has changed its investment strategy dramatically, focusing more on international investments and moving away from traditional stocks and bonds.
The Caisse's three main asset classes -- equities, fixed income, and real estate/infrastructure -- showed positive returns and overall the Caisse's net worth went up $12 billion to $309.5 billion.
“A positive return of 4.2 per cent is a very favourable result compared to just about any index,” said Daniel Thompson, VP of Lorne Steinberg Wealth Management. “It was a very good return.”
Support for SNC-Lavalin
What many are calling good news was overshadowing by questions about the Caisse’s investment in SNC-Lavalin.
Multiple former executives have been charged or convicted in bribery and fraud cases, and the company is facing a ban which would prohibit it from bidding on federal contracts for ten years.
That hasn’t prevented the Caisse from dramatically increased the percentage of shares in the company in the past year, going from 14 to 20 per cent.
"We are convinced about the potential of this company. We have been a long-term investor in this company. I said six, seven years ago that we are not going to throw out the baby with the bathwater with respect to this company. This company has changed itself, and changed itself in fundamental ways with a new management team, a new board of directors, a very different and I think, very effective way of running the company internally. All of that has led to really a very different culture inside this company. A lot of progress is being made," said Sabia.
The ten-year ban would not affect its current projects, including the completion of the Champlain Bridge and the REM transit line.
As far as the company's culture, new management doesn't always translate into new culture and the truth is SNC has a dominant position in the industry because for years it was routinely bribing to win every bid, which it did and that's why some people think it's time to break it up to break its dominance and introduce more competition.
I'm of the school of thought that you don't need to penalize SNC with a ten-year ban because the truth is every major engineering company is corrupt to one extent or another, SNC just broke the mould in this regard, so slap it with a huge fine and move on already.
Anyway, let's leave SNC aside and let me focus on the Caisse's results which were decent even if returns have been steadily declining over the last few years.
Most Canadian pensions lost money last year. CPPIB's CEO, Mark Machin, recently came out saying to prepare for lower returns because both public and private market assets are overvalued.
In fact, for the first nine months of its fiscal year to December 31st, CPPIB posted a net return of 3.6% and for calendar year 2018, its results were similar to the Caisse's.
More importantly, I went over the press release the Caisse put out on its 2018 results, and saw the value added over the benchmark portfolio over the last year and five years is excellent (click on image):
When looking at a pension fund's results, I look at 5 and 10-year results. Over the last five years, the Caisse returned 8.6%, CPPIB returned 11% net of all costs but its fiscal year ends at the end of March.
Still, both of these behemoths have delivered great results over the last five years which is good news for CPP and QPP.
Going forward, I think it's fair to say returns will necessarily be lower but the strategy of shifting more assets into private markets and doing more direct deals (either purely direct or through co-investments) will benefit all of Canada's large pensions.
The following was stated in the Caisse's press release in the highlights:
In 2018, la Caisse pursued its investment strategy, which focuses on globalization, absolute-return management, less-liquid assets, credit activities and impact in Québec. In a year filled with uncertainty for investors, la Caisse’s performance delivered returns to its depositors that are higher than its benchmark. La Caisse’s clients benefited from the results produced by Private Equity and Infrastructure, which performed particularly well against their benchmarks for both one year and over five years. The performance of the Equities portfolio’s Global Quality mandate, which mainly contains securities of companies with solid and stable fundamentals, and the Credit portfolio, are also worth highlighting. While the Real Estate portfolio’s result was below its benchmark, it still generated a return of 7.8% for the year and 9.8% over five years. (click on image)Let me delve deeper and focus primarily on private markets. From the press release:
Private EquityThe Caisse's real estate subsidiary, Ivanhoé Cambridge, is one of the largest real estate investors in the world and one of the best investors in this critical asset class.
In 2018, the Private Equity portfolio totalled $42.9 billion, more than double its total from five years ago. Internationally, over $9 billion was deployed last year. The investment strategy continued to focus on quality partnerships and sustainable value creation. Many transactions were concluded with world-class partners around the world, including in the U.S. and Europe. Among them were investments in Germany-based Techem, valued at €4.6 billion, and in FNZ, a global fintech firm, which represented one of the world’s largest transactions in this sector in 2018 and was concluded as part of a long-term partnership created with Generation Investment Management. La Caisse’s investment in French engineering firm, Groupe Delachaux, which provides high-value-added industrial solutions, particularly in sustainable mobility and industrial efficiency, was also a highlight of the year.
In Canada, la Caisse announced a transaction with Avison Young, the world’s fastest-growing private commercial real estate services company. Lastly, the acquisition of a strategic minority stake in SURA Asset Management was announced at the end of the year. With this transaction, which will be confirmed once regulatory approval is obtained, the company will expand its financial services offering in several Latin American countries.
Real Assets: Strong partnerships and sectors of the future
In an environment where competition remains fierce for real assets, such as infrastructure and real estate, la Caisse puts several of its comparative advantages to use. It relies on the expertise of its teams, including its operational experts, as well as creating long-term partnerships to make direct investments that deliver good performance over time.
In 2018, several transactions were concluded in sectors related to key trends, including sustainable industry, technology, logistics and renewable energy.
Infrastructure
The Infrastructure portfolio had a pivotal year, with assets totalling $22.7 billion, up nearly $15 billion from 2013. Among the main transactions, la Caisse expanded its stake in Invenergy, a leading private North American renewable energy company, and Azure Power Global, an Indian leader in solar energy production. La Caisse also acquired a 40% interest in CLP India, with the goal of turning it into a leading renewable energy producer.
In Colombia, la Caisse announced the creation, with institutional partners, of a US$1-billion investment platform to make equity investments in infrastructure projects and companies. This platform is similar to the one created three years ago in Mexico, which exceeded its investment target of $2.8 billion upon closing the acquisition of eight solar and wind assets from Enel Green Power. In addition, an investment in Québec renewable energy producer, Boralex, which develops, builds and operates production sites in Canada, France, the U.K. and the U.S., helped increase the share of renewable assets in the Infrastructure portfolio to 20%.
Real Estate
In 2018, Ivanhoé Cambridge, la Caisse’s real estate subsidiary, actively pursued the repositioning of its portfolio with transactions (sales and acquisitions) totalling $16.6 billion. In particular, it increased its investments in the industrial and logistics sector, which is capitalizing on the global growth in ecommerce and complements the shopping centres in the portfolio.
In this sector, Ivanhoé Cambridge also made several major acquisitions that contributed to changing the sectoral allocation and selection of its assets. The acquisition of Pure Industrial Real Estate Trust made alongside Blackstone included 173 assets located in densely populated North American cities. More recently, Ivanhoé Cambridge acquired IDI Logistics and created a partnership with Oxford to invest in the company and its assets. This major transaction allows Ivanhoé Cambridge to expand its presence in logistics real estate in North America, with the acquisition of one of the largest developers and managers in this sector in the U.S. Lastly, at the beginning of 2019, Ivanhoé Cambridge confirmed a partnership of US$890 million in Brazil with Prologis, a world leader in logistics real estate.
In Private Equity, the Caisse is going direct under the leadership of Stephane Etroy. It's important to note the Caisse has international private equity and a mandate to invest in private companies in Quebec. Both teams have excellent people at all levels, including senior directors and analysts and they're generating great long-term results.
In Infrastructure, CDPQ Infra is moving ahead with the construction of the Réseau express métropolitain project (REM) in Montréal, a 67-km, light rail, high-frequency network with 26 stations.
This is a mammoth one of kind greenfield project which the Caisse's leader, Michael Sabia, would like to export all over the world. Michael has firm views on a new paradigm for growth based on investing in infrastructure and he also has firm views on doing sustainable investing right.
The media in Quebec hasn't let up on CDPQ Infra and the REM project. Today, someone sent me another lame article from Michel Girard on the governance of this project. I can't say Girard is totally wrong, the Caisse needs to find a qualified independent board for this project (not as easy as it sounds) but his article is terribly misleading on so many levels.
Anyway, I was glad to see the more important Girard, Eric Girard, Quebec's finance minister, was very satisfied with the Caisse's results and said he's not interfering with the Caisse's governance following the Otéra Capital scandal.
If I was Michael Sabia, I would close that operation so fast and relocate all the good employees to Ivanhoe and CDPQ Infra. Enough is enough, a lot of honest and hard-working Caisse employees which have compliance all over their personal transactions are fed up with Otéra and the shenanigans that went on there for years.
Anyway, the investigation is still ongoing, when it's complete, the results will be made public and I'm sure the Caisse will implement new controls and procedures to make sure nothing like this ever happens again.
That's all from me, the Caisse is the fist to report its results but the annual report which contains all the important details doesn't come out till April. It's there where I can see more details on each investment activity.
One thing is for sure, I don't expect high double-digit 2018 results from any of Canada's large pensions but expect returns to be around 5-8% across the board led by returns in private markets. These results are still much better than what the average Canadian pension returned last year.
Below, CTV News Montreal reports on the Caisse's 2018 results. Michael also did an interview in French on TVA which you can watch here.