Big Shakeup at the Caisse?

Frédéric Tomesco of the Montreal Gazette reports that the Caisse consolidates private investments after London-based exec steps down:

The executive upheaval at the Caisse de dépôt et placement du Québec continues.

Less than a week after chief executive officer Michael Sabia announced his imminent departure, the manager of the Quebec pension plan said Monday that Stéphane Etroy is stepping down as executive vice-president and head of international private equity “to spend more time with his young family.” Etroy is based in London.

His departure will allow Canada’s second-largest public pension manager to consolidate all of its private equity activities in Quebec and abroad under one roof.

Etroy will be replaced by Charles Émond, who already oversaw the Caisse’s investments in its home province and now inherits a global portfolio that was valued at about $43 billion as of December. More than three-quarters of the Caisse’s private equity holdings were outside Canada.

“This combination of the private equity teams under one leadership will allow CDPQ to fully benefit from the expertise its teams have acquired over the years, in addition to making it easier to share best practices,” the Caisse said in the statement.

Émond, whose new title is executive vice-president, Quebec, private equity and strategic planning, “possesses solid expertise in concluding complex transactions and managing relationships with partners,” the Caisse said.

Before joining the Caisse in February, the executive spent 18 years at Scotiabank, including a stint as global head of investment banking and capital markets. He was responsible for the bank’s international investment activities on four continents, and for establishing a foothold in South America.

Some analysts had speculated last week that Émond might be considered for the CEO job.

Etroy was one of the Caisse’s best-paid executives last year, with total compensation of about $3.7 million. Émond’s compensation details haven’t been disclosed yet.

Sabia, 66, will leave his post in early February after almost 11 years, the Caisse said last week. He will become the new director of the University of Toronto’s Munk School of Global Affairs & Public Policy.

So, Stéphane Etroy is stepping down as executive vice-president and head of international private equity at the Caisse “to spend more time with his young family.”

Why is Etroy stepping down? I don't like to speculate but it does strike me as odd especially since he was in charge of the best-performing asset class at the Caisse over the last decade and did an outstanding job (which is why he got compensated extremely well).

I have nothing but praise for Stéphane Etroy. Long gone are the days of Normand Provost, his predecessor at the Caisse which was somewhat of a dinosaur. Etroy really transformed private equity at the Caisse for the better, looking at more international deals and stepping up co-investments (a form of direct investing) to reduce overall fees.

Charles Émond is now executive vice-president, Quebec, private equity and strategic planning, which means everything that has to do with private equity within and outside Quebec falls under his purview.

Émond is no slouch. He has great international experience and has steadily managed the Caisse's massive private Quebec portfolio but he is relatively new to the organization, joining less than a year ago. He replaced Christian Dubé who quit the Caisse in September 2018 to join la Coalition avenir Québec (CAQ) where he is now the Minister Responsible for Government Administration and Chair of the Treasury Board.

Anyway, I am a little surprised of these big shakeups given that Michael Sabia recently announced he is stepping down and a new CEO is coming in.

The Montreal Gazette recently called Sabia 'one of the best CEOs in Caisse history' but as I explained a couple of weeks ago, while there's no doubt Sabia did great things at the Caisse, he's also one of the luckiest CEOs in the history of the organization, never having to live through a serious financial crisis.

What else? There’s an increasing amount of chatter and speculation as to who will replace Michael Sabia. My sources tell me Sabia planned his exit in a way that leaves the Board no choice but to name someone internally to replace him (probably Macky Tall who Sabia has been grooming for the position).

The Montreal Gazette states that former PSP Investments head André Bourbonnais, who now holds a senior role at BlackRock Inc. in the US, could also be considered to succeed Sabia.

Given his experience at CPPIB and PSP, Bourbonnais has emerged as the front runner right now to replace Sabia. A native Quebecer, he is fluently bilingual and has tremendous international experience managing private markets, a big prerequisite for anyone leading the Caisse.

I've only met the man once, seemed very nice but some have privately told me "he was an unmitigated disaster at PSP" and they openly question why he left PSP after only three years at the helm of that organization.

Whatever, you get all sorts of feedback on leaders, some good, some bad, so I take everything I hear with a grain of salt.

I know Mark Wiseman recruited Bourbonnais at BlackRock to shake up private equity by heading up BlackRock’s long-term private capital team, known as LTPC.

I'm not sure how successful this venture has been as some CIOs expressed an interest while others have privately expressed their skepticism. I was always a big proponent of this long-term fund but the proof is in the pudding and it has to generate decent long-term returns to prove to investors it's worth exploring this approach in their private equity portfolio.

What else can I publicly share here? Marlene Puffer, the head of CN Investment Division, was "flattered" I mentioned her as a strong contender to succeed Sabia but she told me she is very happy at CN and has no plans to move.

Whoever replaces Sabia, they not only have big shoes to fill, they need to have the experience and intestinal fortitude to weather the next financial crisis. And they need to bring everyone at the Caisse together culturally which is no easy feat (trust me, I know this firsthand, there are still lots of egos there, a lot better than the cowboy years of Scraire-Nadeau-Rousseau but there a still few arrogant jerks that need to be given their walking papers).

But what I find disheartening is that while the Caisse's board of directors will have a short list of candidates, it's Quebec's premier François Legault who seems to have the final say and that's just wrong from a governance standpoint.

Following my comment on the teachers' battle in Alberta heating up, I received two comments from two of Canada's best actuaries. Malcolm Hamilton, a retired actuary who worked at Mercer for years, sent me this after reading that comment:

I don't want to wander into the middle of a political minefield but you are jumping to conclusions supported by opinions, not by fact or analysis.

You are no doubt aware that Quebec decided in the early 1960s that it would rather have its own pension plan (the QPP) than participate in the CPP. Quebec has never changed its mind about this. To the best of my knowledge, you have never criticized Quebec for staying out of the CPP. This being the case, why would you criticize Alberta for evaluating what Quebec has already done? Why not criticize Quebec's "bonehead move"?

Viewed objectively, Quebec made a mistake by opting out of the CPP. The problem isn't poor governance or lack of scale - the QPP is well run. The problem is demography. The QPP costs more than the CPP largely because Quebec's population grew more slowly than the population in the rest of Canada. Since neither the CPP nor the QPP is well funded, good investment performance cannot compensate for poor demography. By opting out of the CPP, Quebecers forced themselves to bear the burden of their own demography. Had Quebecers participated in the CPP, all Canadians would have borne this burden.

There is no mystery here. Pay-as-you-go pension systems force workers to pay for pensioners. In a national pension plan, the "older provinces" (Quebec, BC and the Maritimes) will be supported by the "younger" ones (everyone else). The subsidies are never measured or disclosed. Sometimes it is best not to know what's going on. Still, the subsidies are there and there is little doubt that Alberta (the youngest province) collectively subsidizes the other provinces. I see no harm in acknowledging this. The harder question is whether to do something about it.

There are many subsidies in a national pension plan. Men may subsidize women, who live longer. The poor may subsidize the rich, for the same reason. The healthy subsidize the less healthy. In the CPP and QPP, past generations had a better deal than future generations. Alberta may have subsidized other provinces in the past but that does not mean that Alberta will subsidize other provinces in the future. Its population and economy may change.

DB pension plans never flourish where everyone seeks a subsidy and no one is prepared to subsidize. There needs to be some solidarity and some commitment to sharing. Otherwise the plans die... and few things are uglier than the death of a poorly funded DB plan.

Bernard Dussault, Canada's former Chief Actuary, echoed similar points in his response to my post:

Quebecers are paying more (about 11% vs. 9.99% for the CPP) to the QPP because Quebec is older than Canada as a whole (i.e. the % of seniors is about 15% higher than in Canada as a whole).

If Alberta were to exit the CPP, they would be compelled by the CPP Act to set own their own ‘APP’, which would have to be “similar” to the CPP.

Because Alberta is younger than Canada, the APP contribution rate would be smaller than 9.9%, which Is likely the main reason Alberta wants its own “APP”.

If that were to happen, the CPP 9.9% contribution rate would therefore most likely have to be increased.

I thank both of them for graciously providing me these excellent insights.

My point here is that Quebec made a decision to exit the CPP in the early 60s and Quebec is worse off because of this decision. So it really matters how well the Caisse performs over the long run and it really matters who is in charge of this venerable organization.

Some of the people being rumored to succeed Sabia have what it takes but others (like Monique Leroux) don't have what it takes in my humble opinion.

I'll even throw another name out there, somebody I worked for at the BDC during the financial crisis when I was replacing a senior economist who left on maternity leave. It's their former President and CEO, Jean-René Halde.

Halde is a Harvard MBA, extremely polished and truly fluently bilingual. I have heard him countless times giving speeches in both official languages and he always impressed me.

But it’s how he responded to the 2008 crisis which impressed me the most. I was there, he was regularly having phone calls every week with the late former Minister of Finance, Jim Flaherty, and he really rallied the troops hard at the BDC to deliver on its mandate. That's what you need in a leader, when the going gets tough, they roll up their sleeves and fight in the trenches.

Yes, he's not an investment expert but neither was Sabia and he did extremely well running the Caisse. Halde has tremendous experience and while I'm not sure he wants the stress of the job, he has seen his share of stress at the BDC and would be a fantastic bilingual leader who would be able to rally the troops when the next crisis rolls around.

Anyway, I'm done speculating on who the next leader of the Caisse will be. Eric Girard, Quebec's Minister of Finance, might have been rebuffed at the Caisse, but I think he is a better minister than investment manager. He reads my comments and he needs to openly and carefully discuss potential candidates with his boss. This isn't a time to fool around, they have one shot of getting this right.

Below, an older (2016) interview with Jean René Halde, the former CEO of the BDC (in French). As I stated, the Caisse's board and the premier have a big decision to make, they better make the right one.

Also, Leo de Bever, chairman of Nauticol Energy and former AIMCo head, joins BNN Bloomberg with his take on the Alberta government mulling to exit the Canada Pension Plan, stating "it doesn't make sense" for the province to exit the CPP. I totally agree. Click here if it doesn't load below.