Canadian Pensions Embrace New Technologies?

Earlier this week, the Caisse put out a press release, CDPQ Expands Its Artificial Intelligence Offering:
Caisse de dépôt et placement du Québec (CDPQ) has announced the creation of a fund dedicated to Québec businesses with a proven track record in artificial intelligence. Funded with a $250-million envelope, the CDPQ–AI Fund aims to ramp up growth in businesses whose product offerings are based on the development of AI, and to accelerate the commercialization of artificial intelligence solutions.

This fund, managed by CDPQ’s Venture Capital and Technology team, will serve technology companies that have developed demonstrably sound business models and shown a capacity for continued strong growth. They will need to have a well-established management team as well as a dedicated team with AI experience.

Over the years, CDPQ has invested in many venture capital firms (1) that target artificial intelligence companies in the startup phase. The CDPQ-AI Fund’s objectives include supporting the development of the most promising businesses to emerge from these funds, once they have reached their growth phase.

Note that in 2018 this co-investment strategy, combined with a CDPQ-sponsored venture capital fund, has resulted in CDPQ making direct investments in AI businesses, such as Hopper (fund: BrightSpark), TrackTik (fund: iNovia), or even Breather (fund: Real Ventures). The CDPQ-AI Fund will be used for new transactions of this kind.

In addition to this new fund for growing technology companies, CDPQ has recently announced a series of initiatives and partnerships targeting young AI companies in the startup phase.

CDPQ, in collaboration with Mila – Quebec Artificial Intelligence Institute, created Espace CDPQ | Axe IA to house nine startups from innovative sectors. They will also have access to Mila’s academic resources and advice, coaching and a network of experts from la Caisse and Espace CDPQ, to accelerate the commercialization of their AI solutions. Furthermore, CDPQ will soon have a laboratory, on Mila’s premises, that it can make available to certain businesses in the portfolio that have clearly defined AI integration programs.

Espace CDPQ, a CDPQ subsidiary, is also a founding partner of the Creative Destruction Lab Montréal which, through its extensive academic and business networks, is driving the development of AI technology companies with strong growth potential.

It should also be noted that NextAI, an innovation program designed to create artificial intelligence companies and commercialize technologies, is a new Espace CDPQ collaborator. Active in both Montréal and Toronto, NextAI accelerates and develops businesses in the seed capital and startup phases. NextAI works with teams that are commercializing research on AI and are interested in building global businesses.


1 iNovia, Real Ventures, BrightSpark, White Star Capital, Relay Ventures, Georgian Parners, RV Orbit, Luge Capital, InnovExport, Anges Québec Capital, CTI Life Sciences and Lumira Ventures.
The CDPQ–AI Fund is a new fund but from an experienced team which has a track record investing in many venture capital firms that target AI companies in the startup phase.

Some of these companies have been very successful. For example, the Caisse booked a huge gain when Montreal's Lightspeed IPOed, a rare Canadian IPO success story:
When Dax Dasilva rang the opening bell at the Toronto Stock Exchange on Friday morning, the company he founded 14 years ago, Montreal-based Lightspeed POS, was officially worth almost $1.4 billion.

By the end of the day, as shares (TSX:LSPD) that were sold at an initial public offering price of $16 rose to $18.90, was worth more than $1.65 billion.

It was one of the 10 largest tech IPOs in the history of the Toronto Stock Exchange — and may be the largest ever by a Montreal-based tech company.

“A couple of years ago, people would have said, you’re not going to get American-level valuations, or interest, or volume on the Toronto Stock Exchange, and hopefully we’ll show that that’s just not true,” Dasilva said. “We’ve been able to attract as many American investors as Canadian investors by going public, and also by going public in Canada.”

The IPO raised more than $240 million for the company, which develops point-of-sale software for small and medium-sized retailers and restaurants.

Originally, the company had sought to raise $200 million through the share sale, with shares valued at between $13 and $15. Dasilva said the increased price was the result of “overwhelming demand.”

IPOs are uncommon among Canadian venture-backed companies. Promising firms are often acquired by larger players before they get to the point where they can go public.

“It’s rare that you are able to be in this position, we were lucky because we had long-term Canadian-based investors,” Dasilva said. Montreal-based venture capital firm “iNovia, the Caisse de dépôt, Investissement Québec and myself are the biggest shareholders, so keeping the company independent and keeping it Canadian and headquartered in Montreal, being a tech anchor in this province, that was important to everybody that’s involved.”

Around one-fifth of the company was sold to investors through the IPO. Dasilva remains in control, with the majority of voting shares.

Now, instead of being acquired, Lightspeed plans to start doing more acquisitions as it looks to become a global brand.

“We bought five companies, in the U.S., in Canada and in Europe, and we want to continue to do that and build the company globally,” Dasilva said. “So, rather than having a mindset of being an acquisition target, which is often the case of a VC-backed company, because VCs would like their return, we were able to graduate from the VCs, to long-term holders like the Caisse, and pursue this vision of being a public company.”

Lightspeed had revenue of $57 million during its 2018 fiscal year, which ended on March 31, 2018. It had an operating loss of $21.922 million.

Dasilva said he sees Lightspeed consolidating its market.

“Our market is very fragmented with lots of different, smaller players that are selling to the same set of customers, retail and restaurant SMEs,” Dasilva said.

Currently, Lightspeed has 47,000 customers in 100 countries. But, Dasilva said, there are 47 million businesses around the world in its target market.

Being public will help his company sell to more of those businesses, he said.

“We’ll have greater visibility, we’ll be able to do strategic (mergers and acquisitions), we’ll be able to grow globally,” he said. “We’re going to invest in developers, we’re going to invest in our go-to-market teams. There’s an enormous opportunity to capture more of these 47 million potential customers that could be Lightspeed customers, globally. This kind of event, where you raise this amount of capital, gives you the funding you need to apply to a model that’s already working.”
Remember the name Lightspeed POS (ticker symbol: LSPD.TO). Its shares were up 5% today to close at $21.50 and the company is run by a great entrepreneur, Dax Dasilva, a man with a clear long-term vision who is looking to be the acquirer, not the acquiree.

Why is the Caisse investing in Quebec tech startups? First, unlike other large Canadian pensions, the Caisse has a dual mandate which includes investing in Quebec's economy in public and private markets. It even has a private equity team dedicated to Quebec private companies.

Second, as demonstrated above, the Caisse's venture capital investments are risky but they can be enormously profitable.

Third, I refer you to an article by Don Wilcox I read last month on Real Estate News Exchange, Tech likely Canada’s saviour if recession hits: Morassutti:
If executives arrived at Tuesday’s RealCapital conference in Toronto with concerns about a downturn, CBRE’s Paul Morassutti likely put a bit more spring into their steps.

His annual state-of-the-economy presentation focused on Canada’s booming tech sector, and how innovation could be an economic — and commercial real estate — saviour when recession arrives.

“Some say a recession is looming, sounds ominous,” he said during a keynote address. “This morning, we’re going to explain why there may be less to fear in the Canadian commercial real estate market than many would have you believe. We will also discuss why we believe Canada’s most valuable resource has nothing to do with energy, minerals or anything else that comes from the ground.

“In real estate, identifying areas of growth is fundamental. Increasingly, the areas of growth in Canada are all about technology and our growing knowledge economy. Technology is the catalyst, change agent and king-maker and its impact is rippling through every sector of our market.”

Canada well-positioned if recession hits

Morassutti, CBRE’s vice-chairman of valuation and advisory services, said the rising interest rate environment, combined with historically high global debt, will undoubtedly lead to a reckoning. However, he said economies positioned to benefit from new technologies and lifestyle trends should weather the worst of whatever storms are coming.

He noted the innovation sector extends well beyond what many people think of as traditional “technology” into virtually every aspect of Canadians’ lives.

“Tech has become so ubiquitous across Canadian industries the true impact the tech sector has on Canada’s economy has been understated. CBRE research estimates that for every tech employee hired at a tech firm between 2012 and 2017, there were three more tech employees hired by non-tech firms.

“Loblaws for example, a grocer, employs almost a thousand people in its AI digital division.

“When you look at it this way, Canada’s tech sector is exceptionally diverse and has a multiplying effect on the economy. But even more important is the rate of growth. Over the past 10 years, tech has grown at more than 2.5 times the pace of the energy sector and three times the overall economy.”

Support for innovation from both the private sector and governments has made Canada a true leader in technology and innovation — and that is driving many of the commercial real estate trends today across the country. He pointed out Canada was the first country to create a national artificial intelligence strategy, and the creation of incubators such as MARS district in Toronto opened the door for innovators to become established and grow.

Toronto a “global tech powerhouse”

“In 2017, Toronto produced more tech jobs than San Fran, Seattle and Washington, D.C. combined,” he said. “Toronto has emerged as the undisputed tech capital of Canada and is a global tech powerhouse and it is no coincidence that our downtown office vacancy rate now sits at a 26-year low.

“In Ottawa, tech companies are now the biggest (private sector) tenants, second only to the federal government, occupying more space than the accounting and legal sectors combined.”

Toronto’s office development pipeline of 10 million square feet under construction is 58 per cent pre-leased. Twenty per cent of that is tech sector space, despite the sector historically accounting for only four per cent of total occupancy. Microsoft is moving into the downtown core, taking a landmark 132,000-square-foot lease at the new CIBC Square.

“Tech companies anchoring new buildings is something we have virtually never seen before,” he said.

That expansion is occurring across the GTA and surrounding areas.

“Waterloo region and Toronto form the second-largest tech cluster in North America. This corridor, dubbed Silicon Valley North, encompasses 15,000 tech companies, 200,000 tech workers, and over 5,0o0 tech startups and 16 universities and colleges and is a testament to our tech strength.”

Vancouver and Montreal have also taken great strides, and other Canadian cities have been creating niches for themselves.

He said the good news doesn’t stop there. Canadian immigration policies are welcoming thousands of international students into our universities and colleges, and highly skilled workers into the labour force.

“Capital follows talent, and capital-backed talent produces innovation that will define the future,” he said.

Industrial sector also benefits

Tech is also having a major impact in another outperforming sector of CRE, the industrial market. The impact of e-commerce is driving demand for logistics, and pushing rents higher.

“It is not a stretch to say that we have never seen a better market than the 2018 industrial market. The lowest availability we have ever tracked. Rising rents. In some market, rising dramatically,” Morassutti said.

And while markets like Toronto, Vancouver, Montreal and even Calgary get much of the attention, this trend isn’t focused in a few large centres.

“Demand has outstripped supply for the last 10 years and the new supply pipeline is still low relative to fundamentals.

“Once again, technology is the driver here. The ongoing shift to e-commence remains the primary tailwind. Here in Toronto it represents roughly 85 per cent of all occupier demand and there is more of it to come.”

But, what happens if, or when, the economy begins to slow down?

“All of that sounds great but it raises an obvious question: If tech is having an outsized impact on our market, how durable is that demand? And what happens when we hit a slowdown?”

Apple investors lost $70 billion in value in one day recently, tech stocks have fallen from historic highs, privacy concerns abound and increasing government regulation is in the offing in many sectors.

“Are we in a tech bubble?”

Morassutti also raised the spectre of declining venture capital for startups and rapidly expanding firms.

“Are we in a tech bubble?” He asked, proceeding then to address the possible fallout.

Morassutti said we live in a very different world from two decades ago when the first dot-com crash caused severe economic upheaval. He agreed there will be a “scaling back” of demand, but he does not see the same kind of traumatic impact.

“Fears of a dot-com-style crash appear to be unfounded. First of all, the extremes are not the same. The last dot-com crash was based mainly on hot air and hype.

“As (futurist) David Houle says, tech continues to push into new areas of our lives at a rate that most of us just can’t fathom.

“We can debate current-day tech valuations, even with the decline it may still be overvalued. But when you consider where tech is going; cyber security, health care, fintech, clean energy, proptech, it becomes clear that if anything they are just getting started and the ecosystems around them are not going anywhere.

“Despite softening economic conditions fundamentals at the property level remain incredibly strong. Technological change, and tech business growth and tech talent are the dominant factors driving demand.”

Canada can’t become “complacent”

In keeping with his upbeat presentation, Morassutti said there are many reasons to take heart.

“Real estate is cyclical, always has been and that hasn’t changed,” he said. “We should be aware of those cyclical factors just as we should be aware that our fundamentals as we enter this slowdown are, on average, as good as they have ever been. That is cyclical as well.”

But Canada’s diverse population, safe banking structure, high standing in international “freedom” rankings, and world-leading tech sectors are all huge positives.

“The biggest challenge we have is that this is a race with no end, and there is no room for complacency because we are competing with everyone,” he said.

“Rather than obsess over when the next downturn will hit, I take comfort in knowing the Canadian market is well positioned not only to weather it, but to continue to flourish.”
I don't share Morassutti's enthusiasm for the Canadian economy, think our day of reckoning will come and it won't be pretty, but he raises many excellent points and makes me think long and hard about the tech sector as a creator of jobs and its ability to mitigate the impact of a recession.

Importantly, if CBRE research estimates are correct and for every tech employee hired at a tech firm between 2012 and 2017, there were three more tech employees hired by non-tech firms, then that definitely argues for the Caisse and others to invest in emerging technology companies.

And others are investing in them, including OTPP, CPPIB and OMERS which last month tapped ex-CPPIB exec Mark Shulgan to lead new growth-equity strategy:
OMERS appointed Mark Shulgan to head the Canadian pension fund’s new growth-equity platform, PE Hub Canada has learned.

OMERS announced Shulgan’s hire as a managing director in September, though at the time did not mention the new strategy.

He will now run OMERS Growth Equity, recently set up for long-term investing in high-growth companies committed to innovation in sectors like healthcare and tech, according to OMERS’ site.

The platform’s strategy is to partner with entrepreneurs as a minority investor, deploying equity of $50 million to $250 million and taking board seats.

Previously, Shulgan was a senior portfolio manager in Canada Pension Plan Investment Board’s thematic investing group.

He co-founded the CPPIB group, an investor in private and public companies in North America and Asia, a decade ago.

Before then, Shulgan spent nearly three years as a vice president at Fortress Investment Group.

Shulgan could not be immediately reached for comment.

OMERS Growth Equity represents a third division of OMERS Private Equity, filling a space between the PE group and OMERS Ventures, both of them pioneers of in-house direct investing by a major pension fund.
You'll recall when I covered OMERS's 2018 results, I discussed how OMERS Ventures hired Michael Yang and opened two offices in Silicon Valley and San Francisco as part of an expansion aimed at investing in US startups.

It looks like Mark Shulgan is going to invest in late-stage tech companies that need financing and OMERS will be taking a minority stake in them.

Not sure if his focus is on the US or Canadian market but unlike the Caisse, OMERS, CPPIB and OTPP don't have to invest in Ontario or Canada, their focus is squarely on finding the best investments all over the world.

Still, as the article above states:
“In 2017, Toronto produced more tech jobs than San Fran, Seattle and Washington, D.C. combined,” he said. “Toronto has emerged as the undisputed tech capital of Canada and is a global tech powerhouse and it is no coincidence that our downtown office vacancy rate now sits at a 26-year low.

“In Ottawa, tech companies are now the biggest (private sector) tenants, second only to the federal government, occupying more space than the accounting and legal sectors combined.”
All this to say, there's no reason to ignore Canadian tech companies, especially if they're successful and growing fast (like Lightspeed POS).

Is Venture Capital easy? Of course not, it's exceedingly difficult, need I remind you of what Sequoia Capital's Doug Leone told me back in 2004 right before I managed to persuade him to take a meeting with Gordon Fyfe and Derek Murphy: "My best advice to your pension fund is don't get into venture capital, you will lose your shirt!".

But these big pensions would be foolish to ignore this space altogether, especially if they can partner up with the right VC firms to identify the next key growth areas and growth companies. It is far from easy but it's definitely an exciting area to invest in.

Below, former OMERS CEO Michael Nobrega, chair of the Ontario Centres of Excellence, joined BNN Bloomberg's Amanda Lang from the OCE Discovery 2018 conference with his take on Canada's current competitiveness, stating Canadian pensions should invest in tech startups. Listen carefully to what he said (in May, 2018).

Next, Jim Orlando, managing director at OMERS Ventures, came out with his 2019 Canadian tech predictions that include a warning. He says the most recent wave of tech innovation may be coming to an end. Orlando also talked about the importance of artificial intelligence and why he predicts a rise in bitcoin. Not sure about bitcoin but agree with him on entering a period of tech malaise and that AI is where you want to be.

Lastly, Dax Dasilva, founder and CEO of Montreal software firm and Caisse-backed Lightspeed POS, recently joined BNN Bloomberg as they begin their first day of trading on the Canadian public markets. Like I said above, keep tracking this company, it has a great future ahead of it.