How CDPQ Used the Secondaries Market to Address Overallocation

For Canadian pension giant Caisse de dépôt et placement du Québec, the secondaries market has played an indispensable role in rebalancing its private equity portfolio.

CDPQ generated C$9 billion ($6.5 billion; €6 billion) in liquidity last year, including roughly C$6 billion from selling direct investments and receiving dividend recapitalisations, and around C$3 billion from selling private equity fund stakes in the secondaries market, head of PE Martin Longchamps tells affiliate title Private Equity International.

Secondaries sales were part of Longchamps’ efforts to bring the pension’s PE allocation back on target. When he took over as CDPQ’s head of PE in late 2022, the institution’s allocation to private equity had reached 20 percent for the first time in its investment history, raising concerns over potential overallocation issues.

From the start of his tenure at CDPQ, Longchamps knew his role would be different from the mantle taken on by his predecessors, each of whom had dedicated themselves to building and growing the pension’s PE programme. In Longchamps’ view, CDPQ’s private equity strategy has since reached a mature stage, particularly as it edges closer to its upper allocation threshold.

“If you look at the story of private equity at CDPQ, it was all about deployment up until 2020,” Longchamps says. “Fast forward a couple of years later, private equity had performed well with great returns. Approaching the end of 2022, we found ourselves needing to address an overallocation issue.”

For the new helmsman of private equity at CDPQ, which has C$434.2 billion in assets under management as of December, the priority is to steer the pension’s PE portfolio back to safe waters and ensure its allocation fits within the risk budgets of its 48 depositors.

“‘Don’t think about making new deals. Let’s make sure we get back to the allocation we should be.’ That’s the first thing I told my team,” Longchamps says.

A change of philosophy

When Longchamps took charge of CDPQ’s private equity business, its PE holdings were made up of 75 percent direct investments and 25 percent fund interests. Moving into 2023, he set a goal of reducing the pension’s PE allocation to 18 percent within three years, primarily by selling companies and exiting fund stakes via the secondaries market.

The shift required “a change of philosophy” for investment staff on the PE team, Longchamps adds. These professionals had been trained to spot top private companies and PE funds, rather than to sell their investments.

Divestments weren’t a major part of Longchamps’ past roles, either. Before joining CDPQ, he spent two decades at various investment firms across institutional and private sectors in Canada, where he oversaw deal sourcing, managed investment professionals and worked with executives at portfolio companies. Most recently, he served as head of origination and execution of private equity at the Public Sector Pension Investment Board, one of the largest Canadian public pension plans with C$244 billion in assets. During his five years at PSP Investments, he was responsible for identifying and executing co-investment opportunities with partner funds, as well as creating value for portfolio companies.

At CDPQ, however, Longchamps has found himself in a place where he needs to implement “a mindset of net negative deployment”.

“Given that we are at maturity, we need to sell more than we buy every year to avoid missing vintage years. That’s one of the [most] important changes that we needed to bring forward and deliver against,” he says. “Of course, the selling part is always the hardest, especially as the team had been built to focus on increasing investments rapidly.”

For the first four to five months of his term, Longchamps focused on uniting his team to embrace this transition within its private equity programme. He wanted to come up with a plan quickly, even though the market wasn’t favourable for sellers at the time.

“There is no rush to sell over the long term, but we [need] a plan for implementation and know what steps are required to bring the PE allocation back to 18 percent of the global portfolio.”

CDPQ wasn’t a stranger to the PE secondaries market prior to Longchamps coming on board. In late 2022, the system explored a sale of its PE fund stakes that was reported to be worth more than $1 billion, before ultimately deciding to hold off as markets deteriorated and pricing outlook appeared bleak, as affiliate title Buyouts reported at the time. Prior to that, the system had completed several large offloads of its PE fund portfolios, including a sale of nearly $3 billion to Ardian in early 2022 and a sale of $1.3 billion to an investor group led by Goldman Sachs in 2018.

“Have people been able to sell in the past? Yes. [But] at that time, it wasn’t the focus of our team. It was more of an opportunistic approach and not necessarily driven by allocation issues, as we were in a ramp-up phase,” Longchamps says.

Last year, the selling process went so smoothly that Longchamps’ team managed to bring CDPQ’s PE allocation back to its 18 percent goal by the end of 2023, well ahead of the initial three-year target. What’s more, it was the first time in a decade that the institution’s PE allocation decreased relative to the total percentage of its overall AUM.

The divestments involved a C$3 billion sale of PE fund stakes, which comprised a strip sale of C$1.7 billion and a full exit from a manager that no longer fit into CDPQ’s PE programme, according to Longchamps.

The strip sale involved more than 60 international PE funds and co-investments, according to CDPQ’s annual report. The portfolio was considered high quality, with interests in funds from GPs including Genstar, CVC Capital Partners, Brookfield Asset Management, CD&R, Silver Lake, Veritas Capital and Stone Point Capital, Buyouts reported last year. Partners Group bought a large portion of the portfolio, sources told Buyouts.

“The secondaries space was very crowded when we hit the market. We decided to cut the trade in many transactions to expand the pool of buyers, and we were delighted with how it worked out,” Longchamps says. He added that CDPQ was able to obtain an attractive price for its portfolio sale in the secondaries market.

Unlike other big LPs selling in the secondaries market last year, CDPQ didn’t allow buyers to cherry pick the best assets from its portfolio, according to a source familiar with the strip sale transaction. “It was ‘take it or leave it’,” the source says, adding that CDPQ was able to trade at a higher-than-expected price because it timed the market well.

“Quite frankly, the success of our monetisation plan exceeded our expectations,” Longchamps says. He added that monetisation “will always be part of CDPQ’s muscle”, given private equity’s ability to outperform in the long term.

The alignment issue

For CDPQ’s GPs, accepting that they may be sold in the secondaries market doesn’t come naturally. However, the pension’s strip sale strategy seems to have worked well in creating an alignment of interests.

CDPQ offered only 5-6 percent of its interest in funds involved in its partial portfolio sale last year, Buyouts reported. Longchamps said the strategy was well received by GPs because the pension keeps its vast majority of investments in the funds.

“Secondary sales are something we envision doing on an opportunistic basis to help manage allocation,” Longchamps says. “Our GP partners understand that it is now a tool for pensions to manage overallocation, and they want to help us get there. Additionally, the majority of what we sold was a strip of our portfolio, so we were not ending existing GP relationships. [Instead, we have retained] a collaborative approach.”

Peter Dubens, co-founder of Oakley Capital – one such GP – said the growth of the secondaries market is a healthy development and has made private equity more liquid. “If an LP wants to create liquidity by selling down a position in a group of GPs or a single GP while still being an investor, that’s just about rebalancing the portfolio,” Dubens tells PEI. “We would have no issue with that. It’s actually the beauty of the market.”

Nicolas Zerbib, co-president and CIO of Stone Point Capital, also supports LPs’ secondaries trades. “How LPs optimise their portfolio is their prerogative. Our job is to generate the best returns we can,” he says. “LPs have the right to transfer these stakes — it’s part of the free market that we live in.” Stone Point was among the managers involved in CDPQ’s strip sale last year, Buyouts reported.

Similarly, Jeff Rhodes, co-managing partner at TPG Capital, says he doesn’t worry about CDPQ’s rebalancing exercise. “It’s very logical that with a new leader coming into the programme driving a new strategy, there would be some types of rebalancing… We are understanding of that.”

I've already covered why CDPQ's head of Private Equity thinks the worst thing for a pension is to miss vintage.

Here we take a deeper dive into understanding exactly how CDPQ's PE team used secondaries to address overallocation.

Here is the key passage of the article I want you to hone in on:

The strip sale involved more than 60 international PE funds and co-investments, according to CDPQ’s annual report. The portfolio was considered high quality, with interests in funds from GPs including Genstar, CVC Capital Partners, Brookfield Asset Management, CD&R, Silver Lake, Veritas Capital and Stone Point Capital, Buyouts reported last year. Partners Group bought a large portion of the portfolio, sources told Buyouts.

“The secondaries space was very crowded when we hit the market. We decided to cut the trade in many transactions to expand the pool of buyers, and we were delighted with how it worked out,” Longchamps says. He added that CDPQ was able to obtain an attractive price for its portfolio sale in the secondaries market.

Unlike other big LPs selling in the secondaries market last year, CDPQ didn’t allow buyers to cherry pick the best assets from its portfolio, according to a source familiar with the strip sale transaction. “It was ‘take it or leave it’,” the source says, adding that CDPQ was able to trade at a higher-than-expected price because it timed the market well.

“Quite frankly, the success of our monetisation plan exceeded our expectations,” Longchamps says. He added that monetisation “will always be part of CDPQ’s muscle”, given private equity’s ability to outperform in the long term.

The success of this monetization plan should be part of the Harvard Business Review case study so other large pension funds and sovereign wealth funds can mimic it. 

I bring this up because I recently discussed how Texas Teachers plans on slashing 10% from its massive private equity portfolio but instead of secondaries, it will focus more on mid-market funds, not large buyout funds.

Texas Teachers isn't bullish on private equity and quite frankly, I don't blame them, the asset class is experiencing all sorts of headwinds: high valuations, historic low distributions and creative financial engineering which is raising concern among large LPs that allocate to the asset class.

Martin Longchamps and the folks at CDPQ aren't dummies. Another reason why they monitized the portfolio to shore up liquidity last year was because they expect hard times ahead and want to emphasize liquidity.

It's the same story at BCI, PSP and CPP Investments, everyone is hunkering down and getting ready for a tsunami in private equity (on top of the tsunami in real estate).

Alright, let me wrap it up but before I do some other related items.

Earlier today, CDPQ issued a press release today saying it supports the expansion of Vantage Data Centers’ Québec City Campus:

CDPQ, a global investment group, today announced an agreement to provide USD 75 million (CAD 103 million) as part of a senior financing to Vantage Data Centers, a leading global provider of hyperscale data centers¹, to support the expansion of its Québec City Data Center Campus, QC2. This new investment will finance the construction of the third facility on the four-building campus and will deliver an additional 16MW of IT capacity to serve increasing demand for cloud services across Québec and Eastern Canada. The total USD 130 million (CAD 179 million) credit facility was structured and underwritten by Societe Generale.

Strategically located in Québec’s National Capital region, the hyperscale data center is currently under construction by Pomerleau Inc., one of Canada’s leading construction companies. Once fully developed, the 925,000-square-foot (86 000-square-metre) Québec City Data Center Campus will generate 86MW of total combined IT capacity, and deliver reliable and efficient high computing power to Vantage’s global top-tier customers.

“The surge in data-intensive technologies and cloud service adoption is reshaping the North American digital infrastructure market. Vantage Data Centers is in a leading position to seize this opportunity due to its vast experience in data center buildout and operations, and longstanding customer relationships,” said Marc Cormier, Executive Vice-President and Head of Fixed Income, CDPQ. “This new investment in Vantage leverages CDPQ’s global experience in financing critical digital infrastructure to support the delivery of this important local project.”

"CDPQ's investment will play a crucial role in our expansion in Québec City and in fueling our capacity to deliver high-quality digital infrastructure in the region,” said Maxime Guévin, Senior Vice-President and General Manager of Canada, Vantage Data Centers. “We’re excited to complete this facility in the Spring of 2025, and to deepen our partnership with CDPQ to meet the growing demand for advanced cloud services in Eastern Canada."

“We are pleased to partner with CDPQ and to provide a tailored financing solution to support this expansion by Vantage Data Centers in Québec", said Valtin Gallani, Head of Digital Infrastructure Finance and Advisory, Societe Generale.

CDPQ’s growing footprint in financing digital infrastructure
In addition to this investment in Vantage Data Centers’ Québec City campus, earlier this year, CDPQ invested in Vantage Data Center’s EMEA platform serving key markets in Europe and participated in the USD 7.5-billion debt financing facility to support the growth of AI hyperscaler CoreWeave.

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¹ Hyperscale data centers are typically leased to organizations that operate massive-scale cloud and AI infrastructure to support their business operations.

ABOUT CDPQ

At CDPQ, we invest constructively to generate sustainable returns over the long term. As a global investment group managing funds for public pension and insurance plans, we work alongside our partners to build enterprises that drive performance and progress. We are active in the major financial markets, private equity, infrastructure, real estate and private debt. As at December 31, 2023, CDPQ’s net assets totalled CAD 434 billion. For more information, visit cdpq.com, consult our LinkedIn or Instagram pages, or follow us on X.

I can't say I'm surprised. I recently discussed here how Vantage Data Centers is expanding its EMEA platform with €750m financing from Ares Management, CDPQ and Schroders Capital.

As a reminder, Vantage Data Centers was founded in 2010 and acquired by Digital Bridge, PSP Investments and  TIAA Investments in 2017.

Data centers are all the rage over the past few years and the AI boom only added gas on the fire, so this investment right in our backyard makes imminent sense.

It should also be noted that CDPQ cashed out of data centre consolidator eStruxture in $1.8-billion deal last month after selling its stake to Fengate Asset Management:

The company was launched in 2017 with capital from CDPQ. It claims to be the only Canadian-owned and operated data center platform, operating 15 data centers across Toronto, Calgary, Montreal, and Vancouver with a total footprint of 760,000 sq ft (~70,600 sqm) and 130MW of power.

Lastly, speaking of Canadian and Quebec investments,  James Bradshaw of the Globe and Mail reports CDPQ is selling $700-million of Couche-Tard shares back to the company:

The Caisse de dépôt et placement du Québec is selling a $700-million stake in Alimentation Couche-Tard Inc. back to the Canadian convenience store giant through a private share buyback agreement, recouping cash that the pension fund manager plans to reinvest in the province.

Couche-Tard will pay $80.50 per share to buy back 8,695,652 shares from the Caisse, which is a 3-per-cent discount to the stock’s closing price on July 22. The shares changing hands make up about one-fifth of the Caisse’s interest in Couche-Tard, which was worth more than $3.4-billion when markets closed on Monday.

Once the transaction is complete, the Caisse will still own nearly 32.8 million shares in Couche-Tard, or a 3.5-per-cent stake worth about $2.8-billion.

The Montreal-based pension fund manager periodically trims its exposure to some of its largest stockholdings, several of which are major Quebec companies such as Couche-Tard, engineering consulting firm WSP Global Inc. and business consulting company CGI Inc. But it typically does so in a highly choreographed manner that emphasizes its continued support for the companies.

The buyback deal was prompted by the Caisse’s “periodic portfolio rebalancing,” the two companies said in a joint news release. The Caisse’s head of Quebec, Kim Thomassin, said of Couche-Tard that the pension fund manager has “been a partner of the company for nearly 30 years, and we will continue to support the expansion of this international leader.”

Couche-Tard’s shares have performed well of late, with the stock price up 5.9 per cent over the past month. The company’s share price was relatively unchanged as of midday on Monday on the Toronto Stock Exchange.

In similar transactions in May, labelled as portfolio rebalancing efforts, CGI agreed to buy back nearly 2.9 million of its shares from the Caisse at a discount for proceeds of about $400-million, and the pension fund sold nearly 2.9 million shares in WSP for $600-million through a block trade underwritten by National Bank Financial Inc. and CIBC World Markets Inc.

Ms. Thomassin also said the Caisse plans to reinvest the proceeds from its transaction with Couche-Tard “in other companies in Quebec.” As a pension fund with a dual mandate to earn returns for members while also supporting the province’s economic development, its support for prominent Quebec companies is closely watched. Chief executive officer Charles Emond has set a target to increase the pension fund’s assets in the province to $100-billion by 2026, from $88-billion now.

Mr. Emond said in an interview earlier this year that he regularly tells the CEOs of the Caisse’s portfolio companies that “what matters is not so much how much we own” of the company’s shares, but rather “what we can do next time. ... We will be there for you for the next big trade.”

Couche-Tard will buy back the shares using cash on hand, outside of its normal course issuer bid, with permission from the Autorité des marchés financiers to buy the stock at a discount. The company had previously received permission to buy back up to 78 million shares by April 30, 2025, but has not yet made any repurchases under that bid.

“This transaction is consistent with our opportunistic approach regarding our share repurchase program and broader capital allocation priorities and represents a distinct opportunity to create shareholder value,” Couche-Tard chief financial officer Filipe Da Silva said in a statement.

I remember publicly stating I do not invest in Canadian stocks but if I did, Couche-Tard, Dollarama, Stantec and WSP would definitely be part of my elite Canadian portfolio along with BCE, Enbridge, Royal Bank, Manulife, Sun Life and a few other stocks.

Earlier today, in a widely expected move, the Bank of Canada reduced its target for the overnight rate to 4½%, and I told my nearly 30,000 LinkedIn followers to prepare for a long and painful recession in Canada (it's only the beginning).

That means that CDPQ's massive Quebec portfolio will be stress-tested over the next two years and the pension giant will be called upon to support many of its portfolio companies.

No big deal, just giving you a heads up.

Below, Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers answer reporters’ questions following the policy rate decision and the release of the Monetary Policy Report.

My own thinking is the Bank of Canada is overly confident in its inflation forecast. I can easily see stagflation setting in over the next few years if we get a second wave of inflation in the US or deflation if the Chinese economy collapses and wreaks havoc among risk assets all over the world. 

Top global macro traders are paying close attention to those two economies, not rosy forecasts from central banks.