David Morley, managing director and head of Europe at Caisse de dépôt et placement du Québec, spoke with Nikhil Sanghani, managing director of OMFIF’s Economic and Monetary Policy Institute, on the fund’s dual mandate, alternative investments and private markets and sustainability considerations.
Nikhil Sanghani: Why have you grown alternative asset classes to represent such a significant share? How has this exposure helped in recent years during periods of market turmoil?
David Morley: As a global investment group and a significant fund (C$424bn net assets under management as at 30 June 2023), a key factor is diversification. Around 25% of our portfolio is invested in Canada. However, as the fund has grown, the search for diversification opportunities has led us further afield to seek out new and various markets and assets.
When looking at total portfolio construction, we look for the best balance of risk and return for making an investment. We consider what proportion of assets should be invested in Europe, Latin America or Asia, for example, but we don’t have geographic targets. Instead, we tend to be more asset-class driven, prioritising finding the best investments wherever they’re located.
This most likely differs from other pension and sovereign fund strategies because of the nature of our depositors. CDPQ has 48 depositors that are mainly public and parapublic pension and insurance funds. Depositors make decisions – with CDPQ’s support – on how they allocate to the three major asset classes (fixed income, real assets and equities) in the total portfolio based on their return targets, risk tolerance and investment horizon. Some may allocate more to private equity and less to liquid markets, while others prefer fixed income and infrastructure. We then need to put all of that together, so we tend focus more on asset classes than geography.
NS: What shapes your decisions on how you invest in private markets — directly, co-investing or via fund managers?
DM: It depends on the asset class. CDPQ is one of the longest-standing institutional investors in infrastructure. We consider controlling interests where appropriate, but we also look at co-investment opportunities and are willing to weigh any kind of structure that generates the right level of return. In private equity, we consider controlling interests and occasionally take them, but we are more likely to take a minority stake and co-investment if we can.
One of our recent co-investments in infrastructure is in Dubai. It’s a $5bn deal for us (22% stake) and one of the biggest infrastructure investments in the Middle East. We took a minority stake in three flagship assets owned by DP World, an Emirati multinational logistics company, that we have partnered with over the last six years in 14–15 ports globally. We probably wouldn’t have made the investment had we not known the partner as well as we do.
NS: How do you assess valuations in private markets now? And what are some of the other barriers to investing in private markets?
DM: There are multiple barriers and it depends on the market. Private credit is a hot market without that many barriers, assuming the credit position is right and environmental, social and governance criteria have been met. There’s not a lot of regulatory barriers to lending money.
Infrastructure has a whole set of new challenges that are becoming more difficult to navigate. One challenge is geopolitics. Another is regulation.
Infrastructure investors like CDPQ are looking for predictable regulatory and legal regimes to invest in, because they are making investments over a 25- to 30-year horizon. There are new questions about the reliability and predictability of regulatory regimes. Are the interests of investors and consumers going to be fairly balanced? What is the right political, regulatory and legal mix for infrastructure investment? We need fresh answers to these questions.
NS: Close to 20% of CDPQ’s infrastructure investments are in renewable energy. How important is sustainability to CDPQ’s private investments? How else are you implementing ESG considerations?
DM: What differentiates CDPQ from other funds is the cultural importance of sustainability, both internally and among our depositors. We share an ambition to act in the interests of the community. ESG is fully integrated into our processes from start to finish, it’s not just a box to tick at the end. Since 2018, we have directly linked our employees’ variable compensation to achieving climate targets. Factoring in ESG means we can better assess the long-term viability of a company and more deeply understand the risks it faces. This makes our approach a mechanism for risk management, value creation and innovation.
NS: Are you optimistic that embedding ESG considerations into your investments also offers good risk-adjusted returns?
DM: Yes, we don’t make ESG investments that are worthwhile but don’t make money. We can’t do that — we need to generate returns for our depositors. We’re looking for opportunities at the intersection of ESG and returns, and we don’t accept lower returns just to comply with ESG targets.
This article was published in OMFIF’s Global Public Pensions 2023 report.
