Caisse deploys $5.9 bln in ’17 as strategy shifts to directs from funds

  • CDPQ doing more direct PE deals: Etroy
  • Two-thirds of ’17 PE portfolio assets were directs
  • PE investments overall: 5-year annualized return 13.4 pct

Caisse de dépôt et placement du Québec, one of the world’s biggest investors in private equity, is increasing its capital deployments by doing more direct deals with a select group of partners.

The strategy was on display in 2017, when the pension system closed more than C$7.6 billion ($5.9 billion) in transactions. Stephane Etroy, CDPQ executive vice president and head of private equity, told Buyouts that about 70 percent of the total went to co-sponsorships and co-investments.

CDPQ’s PE portfolio finished the year with C$37.3 billion ($28.8 billion) in assets, roughly two-thirds of which consist of direct investments. This marks a dramatic shift from less than a decade ago, when fund commitments drove the strategy, accounting for more than two-thirds of assets.

Etroy said the portfolio’s reweighting has been gradual and reflects the outperformance of direct investing relative to funds over time. “We generate better returns net of fees and carry,” he said.

PE investments overall generated a net of C$15.2 billion over the past five years, and an annualized return of 13.4 percent, according to CDPQ’s annual report.

Along with returns, doing more direct deals aligns with CDPQ’s financial profile, Etroy said.

The C$300 billion pension system, which invests on behalf of Québec public-sector retirement and insurance plans, “doesn’t need cash flow soon,” he said. This allows for substantial, long-term PE deployments facilitated by direct activity, he added.

One of the results of the strategy has been fewer fund partners. Less than 25 general partner teams secure commitments from CDPQ today, down from more than 100 teams a decade ago.

Etroy said the reduction has not meant lower commitment levels. On the contrary, CDPQ is “investing more with those core relationships we’ve kept,” he said.

These select PE firms are “consistently the most successful,” Etroy said, and maintain close, custom-made relationships with CDPQ, providing access to deal flow, a range of strategic opportunities and exposure to specific markets.

One of them is Ardian, which in 2017 sold stakes in Fives to CDPQ and PSP Investments — a deal that reportedly valued the industrial engineering business at about $1.8 billion — and joined CDPQ in backing Alvest, an airport-services provider. Another is KKR, which last year partnered with CDPQ in acquiring USI Insurance Services for $4.3 billion.

Others include Altas PartnersBlackstone, CVC Capital PartnersCD&R and Silver Lake.

Additional partners

Non-fund investors, such as corporations, family offices and institutions, are also of growing importance to CDPQ’s dealmaking.

A prominent example is Suez, a water optimization and waste recovery company. Last year Suez and CDPQ together bought GE Water, a water treatment solutions provider, for about $3.4 billion.

Etroy says “like-minded” non-fund investors suit the pension system’s preference for taking minority stakes of C$300 million to C$1 billion.

And like CDPQ, non-funds typically approach opportunities with an interest in “the value you can add to a business” held for 10 years or longer, he added.

Looking ahead, Etroy said the PE strategy will stay on its current path, with increasing emphasis given to non-fund partnerships.

He wants to further diversify the portfolio by targeting more deal flow in Europe and emerging markets, and in sectors that reflect “macro trends,” such as education, financial services and healthcare.

To support direct activity, CDPQ will increase the size of investment teams in specific global locations. This will reinforce existing PE capabilities, such as sector expertise, and put CDPQ “closer to action” when it comes to sourcing transactions, Etroy said.

Etroy joined CDPQ in 2015 from Charterhouse Capital Partners. He has since April 2017 overseen the global PE program and its team of some 50 investment pros operating from offices in Montréal, New York, London and Singapore.

Etroy’s deputy, Frédéric Godbout, this week was a keynote speaker at Buyouts Insider‘s PartnerConnect East 2018 event in Boston.

In 2017, CDPQ ranked seventh in Preqin’s global list of the top 100 PE investors