Global Risk Spurs Canadian Pension to Rethink PE Strategy

In the ever-evolving landscape of global finance, pension funds are continually adapting their strategies to navigate economic uncertainties. The Canadian pension fund, Caisse de Depot et Placement du Quebec (CDPQ), is no exception. With a portfolio valued at C$473 billion, CDPQ has announced significant changes to its private equity (PE) strategy, driven by the current economic environment characterized by inflation, rising interest rates, and overall market volatility.

The private equity industry has seen a slowdown in growth due to these economic factors. Karen Rode, a partner at Aon, notes that "a variety of factors — economic uncertainty, rising interest rates and inflation among them — have cooled private equity activity." This pause has prompted CDPQ to rethink its approach to private equity investments, aiming to mitigate risks and ensure long-term sustainability.

One of the key changes in CDPQ's strategy is the increased reliance on partners and third-party managers. As the fund's scale grows, managing the volume of investments becomes more challenging. CDPQ's Chief Executive Officer Charles Emond explains, "Once a fund attains scale, ‘you reach a certain level where you need to actually partner up with a few selected partners to make sure you’re able to actually manage that volume.’" This strategy not only helps in distributing the risk but also leverages the expertise of external managers, ensuring more effective management of the portfolio.

Another significant change is CDPQ's decision to be a net seller every year in private equity. Emond states, "It’s just a matter of balancing this out because we’re not going to hire hundreds and hundreds of people." This approach aims to prevent the private equity asset class from outgrowing the firm, maintaining a balanced portfolio amidst economic uncertainties. By doing so, CDPQ can avoid over-exposure to any single asset class and ensure that the portfolio remains resilient in the face of market volatility.

CDPQ is also diversifying its investments into other asset classes, such as credit and real estate. This diversification helps in spreading the risk across different asset classes and reducing the impact of economic downturns on the overall portfolio. Emond mentions that the pension fund manager ultimately aims to have more liquidity, providing flexibility in managing investments and responding to market changes.

The current economic environment has also affected the valuation and performance of private equity investments. Rode explains that "valuing a public company or a private company is always an art rather than a science," and inflation can impact valuations by affecting future cash flow projections. Additionally, rising interest rates make fundraising more challenging as investors focus on other allocation strategies. CDPQ's decision to remain a net seller every year in private equity reflects this cautious approach, aiming to maintain a balanced portfolio amidst economic uncertainties.

In summary, the global economic uncertainty, including inflation and rising interest rates, has prompted CDPQ to rethink its private equity strategy. By partnering with external managers, balancing asset allocation, diversifying into other asset classes, and increasing liquidity, CDPQ aims to navigate the challenges posed by the current economic conditions more effectively. This strategic shift ensures that the pension fund can continue to deliver sustainable returns for its contributors and beneficiaries, even in a volatile market environment.