Caisse, PSP Invest in Desmarais-Backed Fund

Barbara Shecter of the National Post reports that major pension plans join investor group pumping $229M into Portag3’s second fintech fund:

The Caisse de dépôt et placement du Québec and the Public Sector Pension Investment Board (PSP) are among a group of at least 14 investors pumping $229 million into an international fintech fund run by Portag3 Ventures, an early-stage investor established by companies under the umbrella of the Desmarais family’s Power Corp.

The disclosed institutional and strategic investors committing the new funds also include insurance companies and financial institutions from Canada, France, Israel and the United States. Among them are Aviva France, Harel Insurance & Finance and Silicon Valley’s NSV Wolf Capital.

An earlier fundraising round in 2018 drummed up $198 million from other limited partners including National Bank of Canada, Intact Financial Corp. and Equitable Bank.

“To have a larger fund really allows us to compete in today’s market and ensures that we … have the capability and depth to follow on in those companies that prove to be top performers,” said Adam Felesky, chief executive of Portag3 Ventures.

Portag3’s first fund, which closed in 2016, was backed entirely by companies associated with Power Corp., including Power Financial, IGM Financial Inc. and Great-West Lifeco, which remain anchor investors in the second fund.

“We’ve leveraged their trust and their assistance in helping us develop our platform to bring really credible investors, not only domestically but from around the world,” Felesky said.

In an interview, he said he sees the pensions that came on board in the latest round as potential direct investors alongside the fund in fintechs that become more established down the road.

Portag3 Fund II targets 10 to 20 per cent ownership stakes in the companies it invests in, and more than $100 million has been invested so far in a number of companies, Felesky said. The largest holding is Toronto-based Koho, which is positioning itself as an alternative to traditional banks with no-fee mobile spending and tracking.

Most recently, the Portag3 fund led a Series A investment round for Toronto-based Integrate.ai, a cloud-based machine-learning platform that allows businesses to interact with customers and gather “consumer intelligence.”

Felesky said he hopes some of the companies the fund invests in can replicate the success for Portag3 that online low-cost investment manager Wealthsimple has had for early backer Power Financial. Wealthsimple had more than $3.4 billion in assets under administration as of Dec. 31, 2018.

The focus of Portag3 Fund II is global, but Felesky said Canadian investments are looked at with an eye to choosing those with potential to be “the winner in the market” for domestic fintech.

“It’s more likely a winner takes all,” he said, noting the relative size and development of the Canadian marketplace.

The investment in fintech via the Portag3 fund isn’t the first time Montreal’s Caisse de dépôt has shown in interest in the market segment. Last year, the Quebec pension firm was among a group of investors behind Luge Capital, a $75 million venture capital fund launched to develop early-stage fintech companies and artificial intelligence applications for financial services.

So, the Caisse, PSP and other large institutions are investing in Portag3’s second fintech fund which is raising $229 million targeting 10 to 20 per cent ownership stakes in the companies it invests in, and more than $100 million has been invested so far in a number of companies.

Portag3 Ventures, an early-stage investor established by companies under the umbrella of the Desmarais family’s Power Corp, has big ambitions to revolutionize the Canadian and global financial landscape.

You might be asking why is the Desmarais family backing such a venture? Well, it turns out Paul Desmarais III is very much in tune with anything related to fintech and is intricately involved in Portag3:

Paul Desmarais III is the Chairman of Diagram, Executive Chairman of Portag3 Ventures, and also serves as Senior Vice-President of Power Corporation and Power Financial. Prior to his current position, he worked in the Risk Management Group of Great-West Lifeco. Previously, he worked in project management and corporate strategy at Imerys in France.

Paul has served as director of Great-West Life, Investors Group, Mackenzie, Pargesa and Groupe Bruxelles Lambert. Paul also serves as Executive Chairman of Sagard Capital, Chairman of Wealthsimple and Vice-Chairman of Imerys. Paul is the recipient of a B.A. degree in Economics from Harvard College (graduating cum laude) and he holds a MBA from INSEAD in France.

In short, number III sees the writing on the wall and intelligently approached his father and uncle a while ago and said "we need to get ahead of this or risk becoming obsolete" (obsolete is a relative term when you are running a financial conglomerate like Power but they more than anyone worry a lot about disruptive technologies).

In other words, just like Ontario Teachers' started TIP and Koru to play offense and defense, the Desmarais family is looking out into the future and wisely backed a fintech venture which they hope to capitalize on in a big way.

Will it succeed? That's a tough call. Venture capital is full of promising companies that never go anywhere.

Back in 2008, I worked at the Business Development Bank of Canada (BDC) and saw firsthand what a disaster venture capital can be. To be fair, it wasn't a good time for venture capital which is important asset class and has always been hard.

When I was working at PSP back in 2004, I was helping Derek Murphy set up private equity. I remember organizing a meeting for him and Gordon Fyfe with Doug Leone, one of the founders of Sequoia, one of the best venture capital funds in the world.

Anyway, I called Leone three times to secure a brief meeting with Gordon and Derek. I still remember what he told me: "Listen kid, I like your persistence and will meet your top guys for 15 minutes but we're fighting over whether Harvard or Yale will receive an allocation. We don't want or need pension money. Our last $500 million fund was oversubscribed by $4.5 billion. I'll save your pension a lot of time and money, don't invest in VC, you will lose your shirt."

I also remember Gordon and Derek loved that meeting, they both came to see me when they got back and told me it was "awesome" (Derek grumbled something like "I've never felt so poor in my life").

Was Doug Leone being a little facetious, self-serving and way too doom & gloom? Sure, he has been calling a bubble in venture capital for years and has been wrong for a long time. Eventually, he will be proven right and the recent WeWork scandal is only the tip of the iceberg.

I've said it before, there's too much money backing too many overvalued unicorns.

But I'm also cognizant that we live in an ultra low-rate, low-return world and we need to invest in startups to create jobs for our future. This is why Canadian pensions are rightly embracing new technologies, they need to deliver on their long-term return target and help the local and global economy in any way they can.

Now, getting back to Portag3 Ventures, it has a very impressive team and portfolio of companies and the fund has already exited three of them: Quovo, Wave, Zensurance.

There is no doubt the insurance and asset management business is still ripe for major transformations. And that's not all.

A couple of days ago, had a chat with a friend of mine in Toronto and we openly wondered how real estate brokers in Canada still get away with murder and most of them offer very little value added (they basically corner the market) and  the same goes for many financial brokers charging their clients excessive fees.

In fact, fintech disruption is still in its infancy if you take a very long-term view of the economy and this is why I believe the Caisse, PSP and others are right to invest in Portag3's second fund. It may not be wildly successful but keep in mind, the sums involved are trivial for these two giant pension funds and the payoff can be huge.

Lastly, you might wonder if the Caisse, PSP, and other large Canadian pensions invest in other Desmarais ventures. I was told many of them have been approached to invest in Sagard Holdings but cannot confirm if they have invested in any Desmarais-backed private equity fund (I believe the Caisse did). The only thing I can confirm is David Denison, CPPIB's inaugural CEO, is one of the advisors to Sagard Holdings.

Below, a presentation of Paul Desmarais III at the 2018 Canada FinTech Forum (part 1 and 2). Take the time to watch both clips, you will learn quite a bit on fintech.

Lastly, Michael Sabia recently spoke before the Canadian Club discussing "Constructive Capital". You can read his speech in English here and below I embedded the clip (in French) which is well worth watching.