Thursday, November 4, 2010

Caisse: A Bridge to Québec's Future?

Today was one of those days! My MS was acting up early in the morning. I had this brutal pain in my upper back that felt like someone was sticking a dagger in me. But come hell or high water, I wasn't going to miss Michael Sabia's speech at the Palais des congrès de Montréal at lunch.

I was running late and just my luck the cab driver leaves me all the way on the other end of the building. I was walking with severe pain in my back but there was no way I was going to miss the speech. I finally got to room 520, and ran into some familiar faces which I was happy to see. Sitting next to me at my table was a very nice lady, Lucie Pellerin, a recruiter from St-Amour & Associates (if only all recruiters can be more like her; she gets it!).

Mr. Sabia, President and CEO of the Caisse de dépôt et placement du Québec, Canada's biggest pension fund, was the guest speaker at the the Board of Trade of Metropolitan Montreal's Desjardins business luncheon - Business Voices. He talked about the many facets of the Caisse's contribution to the economic development of Quebec, mainly in the context of a changing world, which both the Caisse and Quebec need to adapt to in order to achieve their full potential.

You can download the speech in French and in English. Mr. Sabia delivered the speech in French, which is very impressive. His French is excellent and he showed tremendous respect to his audience by delivering the entire speech in French. Quebec's elite and media were present, and I'm sure they were equally impressed (people at my table were impressed by that and more importantly, with the content of the speech).

Mr. Sabia started off by saying:
When I enter the office every morning, just across from here, on Place Jean-Paul Riopelle, I think about the privilege of leading the Caisse — an important Québec institution, an institution with immense potential.

The most urgent task, upon my arrival 18 months ago, was to get back on track.
Since then, we have made significant changes:

• We renewed our management team
• We simplified our investment strategies
• We reduced risk and tightened our risk controls
• We developed a client-centric culture

Our performance has improved.

We still have work to do, but it's better now.

Now that the Caisse is resting on more solid foundations, it is time to look to the future.

In doing so, we will address a series of questions and issues that give us the tools to seize opportunities for building a strong, successful Caisse in the coming years.

Our strategies for addressing these challenges represent a new chapter for the Caisse.

Today, I will focus only on one of these strategies: our contribution to Québec’s economic development.
With that he delved into the core issue:
The genius of the Caisse’s architects — Lesage, Parizeau, Castonguay, Marier — was to understand the importance of adding a financial institution to all the other reforms, a financial institution to make Québec’s social and economic transformation possible.

The Caisse was founded to serve this purpose.

At that time, the world was very different.

It was cut in half, immersed in the Cold War.

In China, a revolution was just beginning: the infamous Cultural Revolution.

The European Union was still light years away.

There was no free trade and nobody talked about globalization.

There was no Internet, no laptops, no cell phones, no Google.

Imagine such a world.

The world has changed.

Almost 50 years later, the Cold War is over.

We have global markets.

Instant communications.

And a global world.

China has become the world’s second-largest economy.

The euro is the currency for a market of more than 350 million people.

India, Brazil and many other countries are also becoming leading economic powers.
Quebec has also changed.

We’ve become a world centre of high value-added sectors:

• Multimedia
• Aerospace
• Engineering
• Biotechnology
• Environment technology

There are Laurent Beaudoin, the Lemaire brothers, Serge Godin, Alain Bouchard, Marcel Dutil and many others.

And now we see a whole new generation: Pierre Beaudoin, Sophie Brochu, Marc Dutil, Guy Laliberté, Monique Leroux, Pierre Karl Peladeau and more.

It has become quite normal to see Francophones at the head of the Québec economy.

What’s surprising now is to see an Anglophone Quebecer at the head of the Caisse...

This just shows you how much things have changed.
That last comment elicited quite a chuckle from the audience. I think he took a little shot at his critics and some in the media who think only Francophones should be at the helm of the Caisse (pure nonsense).

He went on to say:
Here, we must ask a fundamental question.

In this incredibly different world, how can the Caisse serve the best interests of Québec?

Must we adapt to a new reality?

The answer is yes. The Caisse is ready to keep pace with this new emerging world.

This must be based on our comparative advantages:

• Our in-depth knowledge of Québec
• Our role as a long-term investor
• Our critical mass
• Our international scope

The objective of the Caisse remains the same. Here’s what Mr. Lesage had to say about the Fund in 1965 — and I quote: “It must both meet the criteria for adequate profitability and make funds available for Québec’s long-term development.”

As in 1965, we must grow the assets of our long-term depositors, so they can meet their obligations. This is vital for Québec.

It has never been more important than today, as many Québecers are about to retire.

Quebecers must know that they will have access to their pension funds.

This is crucial. That’s why we reinforced the Caisse’s foundations.

That's why we make investments based on our comparative advantages.

We are willing to take risks — calculated risks — by investing in high-quality companies.

Well-managed, promising companies.

And where can we invest with a clear comparative advantage?

In Québec.

We have an intimate knowledge of the local market, economy and companies.

It is only natural that, in the pursuit of healthy returns, we invest here.

You cannot artificially separate the issues of returns and Québec’s economic development. The two go hand in hand. Accordingly, we aim to seek and seize profitable private equity, stock and real estate investment opportunities.

In small, medium-sized and large companies. In every region of Québec.

In this respect, our commitment is quite clear.

The $1.4 billion increase in our private sector investments in 2009 is very real.

We're here to serve our clients, to serve Québecers.

Mr. Sabia then gave some specific examples to follow-up on those comments:
How? By making long-term, stable and profitable investments in the areas we know well.

Take, for example, Gaz Metro:

• It’s profitable
• It’s low risk
• It has good cash flow
• It operates in one of Québec’s vital industries

This investment is perfectly in line with the needs of our clients.

And, at the same time, with our Québec development objective.

That's why we recently decided to increase our stake in Gaz Metro by purchasing SNC Lavalin shares.

Invest in SMBs

Right now, I'm talking about a big company, but we also focus on SMBs.

Québec has been successful for 30 years as a remarkably diversified economy.

Such a thing is possible with dynamic SMBs.

International companies sometimes start in the basement.

Serge Godin literally started CGI in his basement. Today, it’s a company with 30 000 employees in 15 countries.

Cascades, originally a family business, is another example of how an economy can grow over time.

Of course, there are dozens of Québec SMBs that may turn into major global organizations.

There are hundreds of young entrepreneurs, extraordinary managers, scientists and
technicians — determined, full of new ideas.

They are the ones who are building the Québec of tomorrow.

We must invest in the best, the most promising.

Not only to contribute to Québec's development, but also to seize business opportunities.

SMBs are everywhere in Québec. But not the Caisse.

How can we ensure that SMBs have access to our expertise and financial resources?

Our response: by forging a partnership with Desjardins, a financial institution very well integrated into the social and economic fabric of Québec.

Together, we created a $600 million fund.

We have already started investing…

From Montreal to Daveluyville

From Métabetchouan to Val-d'Or

All the way to Havre-Saint-Pierre

We will make sure to find SMBs dedicated to a bright future and provide our services and funds to develop Québec — as a whole — over the long term.

As far as I’m concerned, I will continue doing my part.

I'll go to any region and talk to people about what we do.

What we can do with them and for them.
Mr. Sabia also spoke of the Caisse's initiatives with Québec universities:
This brings us to our relationships with Québec universities.

For years, we’ve had ties with UQAM, McGill and HEC.

Now we’ve gone even further:

• Within the Caisse, an ongoing internship program
• With the Université Laval and UQAM, research programs in financial analysis
• With Sherbrooke, an agenda for research on investment practices
• With École de technologie supérieure, a financial engineering program
• And with Concordia, a sustainable investment program

So these are altogether another type of investment…in Québec’s financial expertise.

An investment, so to speak, with a very healthy return.
Finally, M. Sabia had this to say about the international challenges that Québec faces and how the Caisse can help build a bridge to the future:
In this incredibly different world, the challenge will not be easy.

For 20 years, Quebec's share of Canada’s total exports has declined. The ratio of exports to GDP of Quebec is lower than the Canadian average.

Only 30% of Québec’s small and medium-sized export companies are in Europe.
Only 16% of these SMBs are in Asia. That’s just too little. Québec is facing an international challenge.

To enrich itself, to build large companies, Québec should export more.

And it should do it around the world.

There is no doubt in my mind that Québec’s economic future will be partly decided by our ability to penetrate major markets worldwide.

The fact that a society of fewer than 8 million people has such a financial institution is not a common phenomenon.

And given the limited size of the Québec and Canadian economies, the Caisse has been motivated to expand its presence in international markets over time.

45% of our equity securities are international. 55% of our real estate portfolio is located abroad. And 70% of our private equity is outside Canada.

To obtain returns for our depositors, we will continue to expand our presence in new
international markets.

The Caisse’s international perspective.

Our investments worldwide.

Our network of international contacts.

Our expertise from new markets.

All of it can be put to the service of Québec companies.

First, in the U.S. market.

Despite the difficulties of our neighbours, we are, after all, talking about the world's largest economy and a market we know well — a market that must remain a priority.

Québec must also broaden its presence in Europe, a market of more than 500 million
people.

To simplify Québec company access to this market, we entered into a partnership with AXA Private Equity, a large French firm, in October 2009.

At the same time, of course, we must look toward Asia and South America — to countries
with very strong growth.

With this in mind, we just forged a partnership with HSBC, a global financial institution with a strong presence in Asia and Brazil.

This agreement aims to provide Québec companies with the support of both institutions.

They offer financing for international projects of over $10 million.

This expertise and these networks are for our depositors, Québec businesses and, in turn, Québec.

At the same time, we launched a co-investment strategy with Québec companies.
Cirque du Soleil, already well-established in many countries, is a good example.

With Cirque du Soleil, we recently co-invested $25 million in a production and development fund. The goal? Create new products that will broaden the Cirque’s presence worldwide.

The Caisse has critical mass, expertise, scale and credibility in international markets.

And we aim to further extend our network of contacts and expertise around the world, especially in emerging countries.

In the future, we will develop more partnerships with international institutional investors who share our long-term vision.

Sovereign wealth funds or other international pension funds in Canada, Norway, China or Singapore. I think that’s where a vital part of the Caisse’s contribution can be made — where the Caisse can serve as a bridge between our portfolio companies and the world.

This is the part of our economic development strategy that we must emphasize and
intensify.

The Caisse’s international dimension, which contributes to Québec’s brand image and reputation worldwide, is part of the legacy we have inherited from our predecessors.

A legacy that we must continue.
The key for the Caisse is to leverage off its investments partners, Québec universities and build solid networks across the globe with large sovereign wealth funds and other large global pension funds. But the challenges for Québec companies are huge and it remains unclear how the Caisse's comparative advantages will be used to help these companies meet these challenges.

However, one thing is clear, the commitment is there and as the world changes for better or for worse, the Caisse will continue to play a vital role in shaping, promoting and sustaining Québec's economic development.

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