CDPQ invests record $7.9bn in 2019, as PE strategy continues shift to directs

Following a significant re-weighting of CDPQ's private equity portfolio, direct investing represents more than three-quarters of all activity.

Caisse de dépôt et placement du Québec, one of the world’s biggest investors in private equity, deployed C$10.5 billion ($7.9 billion; €7.3 billion) in the market in 2019, according to its year-end financial report.

CDPQ’s PE investment levels last year broke all prior records, exceeding by 17 percent the C$9 billion deployed in 2018. This growth pushed net portfolio assets to more than C$50 billion at the end of December, or 14.7 percent of total assets.

CDPQ has aggressively ramped up PE activity of late, mostly through co-sponsorships and co-investments. In recent years, direct investing has steadily assumed a much higher proportion of outlays compared to fund investing, which drove the strategy a decade ago.

This is reflected in the 2019 report, which said direct interests in companies today represent more than three-quarters of PE portfolio activity. That’s up from two years ago, when directs held a two-thirds share.

Deals contributing to last year’s peak investment include CDPQ’s purchase of a stake alongside Warburg Pincus and Wendel in Allied Universal, which valued the US security services provider at more than $7 billion. CDPQ also partnered with Brookfield Asset Management in the $4.1 billion take-private acquisition of Australian hospital operator Healthscope.

In addition, CDPQ invested alongside Novacap in Nuvei, supporting the Canadian payment tech company’s $889 million add-on acquisition of Britain’s SafeCharge. It also bought an interest in US financial services business Hilco Trading and agreed to target annual commitments of about $150 million to distressed assets and other special situations.

CDPQ decided to re-weight its PE portfolio after direct investing showed consistently superior performance relative to fund investing. “We generate better returns net of fees and carry,” Stephane Etroy, the former head of private equity, said in a 2018 interview with Buyouts.

CDPQ reiterated this point in last year’s report. It said the shift to directs was key to the PE portfolio’s 12.5 percent annualized return over five years, ahead of its benchmark. Directs also bolstered the one-year return of 10.5 percent, which was shy of its benchmark.

While CDPQ is giving more prominence to directs in the PE strategy, it is not giving up on funds. In fact, it has typically increased commitments to partners like Ardian, Blackstone, Clayton, Dubilier & Rice, KKR and Silver Lake to ensure exposure to specific opportunities and markets. CDPQ is also pursuing more deal relationships with non-fund partners.

The leadership of CDPQ’s PE group is undergoing change. Etroy left last year and has since joined Ares Management as head of European private equity. He was replaced by Charles Émond, a former Scotiabank executive who joined CDPQ earlier in 2019.

Émond, however, is unlikely to lead the PE operation for much longer. In January, CDPQ announced his appointment as president and CEO, replacing Michael Sabia.

CDPQ did not indicate a process for finding a successor to Émond in the top PE job. Potential candidates include his team’s seven managing directors: Thomas Birch, François Boudreault, Arthur Brohinsky, Daniel Leith, Lorenzo Levi, Meng Ann Lim and Jean Potvin.

Montreal-based CDPQ invests on behalf of Quebec public-sector retirement and insurance plans. It posted an overall annualized return of 10.4 percent in 2019, and 8.1 percent over five years, expanding net assets to more than C$340 billion.

CDPQ did not respond to a request for comment prior to publication of this story.

Action item: See CDPQ’s 2019 equities summary report here.