CDPQ's 2019 Annual Report

Caisse de dépôt et placement du Québec (CDPQ) just released its 2019 Annual Report:
Caisse de dépôt et placement du Québec (CDPQ) today released its Annual Report for the year ended December 31, 2019, a little later than usual due to the exceptional situation related to COVID‑19. In addition to the detailed analysis of its financial results released on February 20, the report provides a complete overview of its activities. Here are some highlights:

  • Annualized return of 9.2%.
  • Net assets increased from $131.6 billion in 2009 to 340.1 billion in 2019, with $191.0 billion in net investment results and $17.5 billion in net deposits.
  • The proportion of assets invested in international markets rose from 36% in 2009 to 66% in 2019.
  • Annualized return of 8.1% and net assets grew $114.2 billion, with net investment results of $106.0 billion and net deposits of $8.2 billion.
  • As at December 31, 2019, CDPQ’s five-year return outperforms its benchmark portfolio by 0.9%. This difference represents $11.0 billion in value added.
  • Returns for the eight main depositors ranged from 7.2% to 8.9%.
  • Global return in 2019 of 10.4%, below the benchmark portfolio by 1.6%.
  • Net assets grew by $30.6 billion on net investment results of $31.1 billion, offset by net depositor withdrawals of $0.5 billion.
  • Returns for the eight principal depositors ranged from 9.5% to 10.8%.
  • Total assets in private Québec companies have now reached $47.6 billion, an increase of over 155% in 10 years.
  • Partnered with over 750 companies, including over 650 SMEs.
  • New investments and commitments of $21.9 billion over five years.
  • Several solid achievements in each pillar of CDPQ’s strategy in Québec, including:
    • Impactful projects: Continued construction on several branches of the Réseau express métropolitain (REM), including 2 kilometres of rails on the South Shore, and the launch of construction on ten stations.
    • Growth and globalization: Investment and support for the growth and globalization of Québec companies, including Alt Hotels, Sollio Cooperative Group (formerly La Coop fédérée), Golf Avenue, Nuvei and Top Aces.
    • Innovation and the next generation: Creation of a $250-million fund for companies specializing in artificial intelligence and launch of a $50-million envelope for seed funds for innovative companies.
  • Continued globalizing CDPQ’s activities, a pillar of its strategy, which has resulted in a 2% increase in exposure to global markets, reaching 66% at the end of 2019, including:
    • Increased investments in the United States, including one in partnership with Hilco Global, a leader in financial services, to support its growth strategy, and another with Ontario Teachers’ Pension Plan (OTPP) and Constellation, to launch a global insurance platform.
    • Key transactions in growth markets with partners, including LOGOS in India, Prologis in Brazil and Australis Partners, IFC and Organización DeLima in Colombia.
  • Private Equity: Investments of $10.5 billion in various growing companies in Québec and around the world, major transactions in various sectors, including security services in the United States, health care in Australia and the pharmaceutical industry in Mexico.
  • Infrastructure: Almost $5 billion in investments with acquisitions of significant stakes in various companies, including alongside a global energy leader established in Brazil and a U.S. leader in wireless communication towers, as well as in various ports around the world.
  • Real Estate: A market undergoing major changes that requires an active transition to lower the weight of more traditional assets and prioritize opportunities in tomorrow’s sectors. In 2019, more than $11 billion in acquisitions, capital investments and sales, significant increase in assets in promising industrial real estate sectors, especially in Asia Pacific, Brazil and India, and in logistics in the United Kingdom.
  • Credit: Loans to various companies, including Lightsource BP to create a global solar asset platform and to Maestria Condominiums to finance the construction of this residential project in Montréal.
  • In 2019, market risk remained stable compared to 2018 and was slightly above that of the benchmark portfolio.
  • During the year, CDPQ enhanced its post-investment monitoring process.
  • To accompany its Annual Report, CDPQ published its Stewardship Investing Report, which sets out its vision and commitment to priority topics:
    • Climate change
    • Diversity
    • Governance
    • Investing in the community
  • In terms of the fight against climate change, CDPQ has added $16.8 billion in low-carbon assets since 2017, including $6.9 billion in 2019.
  • Since 2017, the portfolio’s carbon intensity was reduced by 21% against an objective of a 25% reduction by 2025.
  • Proactive leadership in co-founding the Net-Zero Alliance, an initiative that calls on major investors to commit to achieving carbon-neutral portfolios by 2050.
  • Since 2018, in collaboration with 14 international peers, CDPQ has taken concrete and direct action on climate change, diversity and sustainable infrastructure as part of the Investor Leadership Network.
  • The electronic version of the Stewardship Investing Report.

The principles underlying the compensation program for CDPQ employees in Québec and around the world remain unchanged: pay for performance that is aligned with returns delivered to depositors, offer competitive compensation and link the interests of management and depositors (see page 91 of the Annual Report).

However, as the world is experiencing the unprecedented COVID‑19 pandemic, CDPQ decided, given current economic conditions, to freeze the salaries of all leaders in the organization for 2020 and postpone the payment of 2019 variable compensation to the third quarter. In addition, the members of the Executive Committee have decided to postpone and co-invest the maximum possible of their variable compensation for a period of three years as of January 1, 2020, until 2022.

Implementation and application
  • Rigorous benchmarking against reference markets by a recognized independent firm—Willis Towers Watson—and studies on positions based outside of Canada by McLagan.
  • At the request of the Board of Directors, validation of the application of the compensation program was conducted by Hugessen Consulting, an independent consulting firm recognized for its expertise in the compensation of pension fund personnel.
  • CDPQ’s Compensation Policy complies with the Principles for Sound Compensation Practices issued by the Financial Stability Board and endorsed by the G20 nations: effective compensation governance; alignment of compensation with long-term, measured risk-taking; and regular review of compensation practices.
  • Review the performance of each employee using a rigorous evaluation process to determine the variable compensation, based on individual performance, portfolio or team returns and CDPQ’s performance, measured over five years.
  • A component is linked to the carbon footprint intensity reduction target to support CDPQ’s strategy to address climate change.
Mandatory co-investment thresholds
  • To foster better alignment of employees’ interests with CDPQ’s ongoing long-term success, a significant portion of total variable compensation of management and senior professionals is deferred for a period of three years, in compliance with the rules of the Canada Revenue Agency, which requires the amounts to be paid at the end of that period.
  • It is mandatory to place minimum amounts in a co-investment account for employees who have direct influence on CDPQ’s organizational and financial performance:
    • At least 55% of the total variable compensation of members of senior management, thereby strengthening the alignment of management and depositor interests and making this measure even more stringent than common industry practice–with the exception of 2019, for which the threshold was raised to include the maximum possible variable compensation due to COVID‑19.
    • 35% of total variable compensation for vice-presidents and intermediate and senior investment employees.
    • 25% for other managers and high-level professionals.
  • The deferred amounts to be paid in 2022 that relate to 2019 are put at risk, as they will rise and fall in tandem with CDPQ’s absolute overall return during this period.
  • This year, as part of the variable compensation program, employees (including senior management) have deferred until 2022 a total of $44.2 million. Employees of CDPQ’s international subsidiaries deferred a total of $13.3 million into the co-investment portfolio.
  • Amounts co-invested as part of the variable compensation program were paid in 2019, in compliance with program conditions and applicable tax rules. Amounts paid in 2019 that had been co-invested and reported in 2016 by the five most highly compensated executives reporting to the President and CEO are presented in Table 38 on page 101 of the 2019 Annual Report.
Variable compensation
  • Since 2016, performance has been measured over a five-year period, which further strengthens its long-term sustainability.
  • Including variable compensation, total compensation for CDPQ employees in 2019 was slightly below the median of the reference markets for superior performance over five years, where the 8.1% annualized return corresponds to $11 billion in valued added compared to the benchmark portfolio (page 94).
  • In keeping with CDPQ’s strategy to deliver sustained long-term performance, the following table contrasts the 2019 variable compensation awarded to CDPQ employees relative to absolute returns generated and value added, which includes a deferred portion that will rise and fall with future returns.
  • The increase from 2018 to 2019 in variable compensation awarded mainly stems from an increase in the number of investment employees.
  • CDPQ’s exposure to global markets now represents 66% of the portfolio and generates advantageous returns for its depositors.
  • CDPQ also generated conclusive results over the last five years in Québec, with over $21 billion in new investments and commitments over the period.
2019 Compensation

Compensation for 2019 reflects sound management and rigour in control over costs, as the following facts show:

  • CDPQ’s operating expenses and external management fees, which remained around the same level in 2019 as in 2018, was 23 cents per $100 of average assets—up barely 1 cent—a ratio that compares favourably to that of its industry.
  • Around 90% of CDPQ’s assets are managed internally, which is five times less costly than managing assets externally.
  • Senior executive compensation is below the maximum of 42% on average (see the tables on pages 94 and 100).
“To perform in a competitive environment, you need to have the best talent, both here and around the world. This will be even more important in the next decade, as the global economy suddenly lost steam and CDPQ’s portfolio is tested. Our organization has the teams to take on this challenge under the leadership of Charles Emond as President and Chief Executive Officer,” said Robert Tessier, Chairman of CDPQ’s Board of Directors.
Compensation of the President and Chief Executive Officer

Base salary and direct compensation
  • Pursuant to policies on achieving CDPQ’s business objectives and organizational performance, the Board considers that “the President and Chief Executive Officer had surpassed the objectives that he had been given at the beginning of the year and that his performance during 2019 greatly exceeded their expectations of him.”
  • Mr. Sabia’s base salary remained unchanged at $500,000 in 2019 and his variable compensation awarded for performance for the year was $3,857,000, which will be paid in the third quarter of 2020. Including the value of the pension and other forms of compensation, his total awarded compensation for the year was $4,425,300.
  • In light of his stepping down, and pursuant to the variable compensation program, his co-investment accounts for 2016 to 2018 were fully disbursed at the time of his departure.
Pension plan and severance
  • When Mr. Sabia was appointed he waived membership in any pension plan for the duration of his mandate, except for mandatory plan membership under Retraite Québec rules for management personnel.
  • He also waived any severance.
Comparison to reference markets
  • Additional details on the compensation of the President and CEO and the five most highly compensated executives are provided on pages 96 to 104 of the Annual Report.
The electronic version of the 2019 Annual Report and 2019 Additional Information are available at:

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at December 31, 2019, it held CAD 340.1 billion in net assets. As one of the largest pension fund in Canada, CDPQ invests globally in financial markets, private equity, infrastructure, real estate and private debt. For more information, visit, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.
Alright, so the most important documents to revew are available at:
I took the time to read through CDPQ's 2019 Annual Report. It's well worth reading, especially the Chairman's and President's message (pages 18-21).

Anyway, since most people skip to executive compensation to see how much Michael Sabia and senior executives made last year, let's get that out of the way first:

As you can see, Sabia made CAD $4.4 million before departing the organization, Charles Emond, the new CEO earned CAD $2.8 million, Macky Tall the Head of Liquid Markets made CAD $3.1 million, Stephane Etroy who was the Head of Private Equity before leaving to join Ares Management earned 2 million pounds which translates into $3.4 million Canadian dollars, Emmanuel Jaclot, the Head of Infrastructure, made 1.6 million pounds which is roughly $2.7 million Canadian dollars and Anita George, the Head of Strategic Partnerhips - Growth Markets, made a total compensation of 112.4 million Indian rupees which is roughly $2 million Canadian dollars.

I can tell you CDPQ's compensation has improved drastically over the last 15 years but it still slightly lags that of its large peers in Canada.

For example, OMERS recently put out its 2019 Annual Report and we can see how much its top brass earned based on their long-term results which are in line with those of the Caisse (8.5% annualized 5-year return vs 8.1% annualized for CDPQ):

And keep in mind, unlike its peers, CDPQ decided that given current economic conditions due to the pandemic, to freeze the salaries of all leaders in the organization for 2020 and postpone the payment of 2019 variable compensation to the third quarter. In addition, the members of the Executive Committee have decided to postpone and co-invest the maximum possible of their variable compensation for a period of three years as of January 1, 2020, until 2022.

Now, my wife who teaches kindergarten at one of the poorest public schools in Montreal and has her pension money managed by the Caisse asked me: "Remind me again why we pay these pension managers so much money? Are they really worth the millions they receive?"

I answered her honestly: "There's no doubt these guys and gals get paid big bucks which might seem excessive to you and the rest of the world putting in a hard's day work but keep in mind, it's the finance industry and everyone is overpaid in finance, especially big bankers, brokers, hedge fund managers and private equity managers. People only see the big compensation but trust me, you don't want their lives, it's back-to-back meetings and very high stress, especially when times are tough, like now. You can be fired at any time for underperforming. Pension managers have a huge responsibility to deliver great long-term results over their benchmarks and they need to make sure the pension remains fully funded. To do this, they invest across public and private markets all over the world and it's not easy."

My wife: "Ok, land this plane already, are they worth the millions they get and how does it impact my pension? Is my pension safe and will I be able to rely on it in retirement?"

Me: "Yes honey, your pension is safe and they are worth the millions because if you had incompetent pension managers managing your pension and that of Quebec's public sector workers, the pension system would be far more costly and the long-term results would be far inferior, jeopardizing your pension that you work hard for."

My wife: "Alright, that's all I needed to know. By the way, all these pension managers making millions off my contributions should come work with me one day to see how the poorest immigrant kids in Montreal are coping with unimaginable obstacles during this pandemic. That will give them some much needed perspective."

She's right, too many in people in finance have zero perspective of what abject poverty lies in our city and how the poorest neighborhoods bore the brunt of this pandemic in every way.

Fortunately, CDPQ and its employees do donate to charities to alleviate poverty and help seniors who are living alone (now if I can only get them to donate regularly to Pension Pulse, reminding them this blog isn't a charity!).

Alright, compensation is always a touchy subject and the only reason I shared my private conversations with my wife is because most of the population is thinking like her when they see the compensation at large public pensions and you need to explain it in a clear and transparent manner.

For CDPQ, compensation is based on five-year results. The performance over the last five years is an annualized return of 8.1% where net assets grew $114.2 billion, with net investment results of $106.0 billion and net deposits of $8.2 billion.

To put this into perspective, check out the table below:

That annualized return of 8.1% over the last five years is 90 basis points or 0.9% more than the benchmark index which returned 7.2% annualized over the last five years.

Most of those gains over the last five years came in Equties (10.7% vs 8.9% for the index) and to be more specific, Private Equity.

That's why Stéphane Etroy, the former Head of Private Equity commanded such big compensation but so did Charles Emond as there was some private equity in CDPQ's massive Quebec portfolio which he was in charge of.

By the way, the press release above states assets in private Québec companies have now reached $47.6 billion, an increase of over 155% in 10 years.

So $48 billion of CDPQ's total $340 billion are in Quebec and that includes public and private investments like the REM project and real estate holdings.

Put another way, 14% of CDPQ's total assets are invested in Quebec across public and private companies.

Michael Sabia, the former CEO, has personally assured me that this portfolio is profitable, but that was before COVID-19 struck the Caisse's huge real estate portfolio which is made up of many malls.

Keep in mind, unlike other large Canadian pensions, CDPQ has a dual mandate to maximize returns without taking undue risks and invest across public and private companies in Quebec, effectively supporting the Quebec economy.

For many years, nobody questioned this dual mandate because the Quebec portfolio was profitable, but I openly wonder how CDPQ's portfolio will survive this pandemic as some sectors in real estate (malls in particular) will be decimated and many small private companies will be facing bankruptcy.

Sure, CDPQ will provide liquidity and its expertise to companies that need it, but will it be enough to help them weather this pandemic? That remains to be seen.

Meanwhile, CDPQ's large Canadian peers are continuing to diversify their holdings outside of Canada, as is CDPQ, but they don't have a local mandate.

If the Quebec portfolio remains solid and profitable, great, but if for any reason it doesn't, then they really need to revisit this dual mandate and whether it's in the best interest of all Quebecers.

One industry expert told me: "There's a lot of illiquid stuff in that Quebec portfolio that is marked very favorably but if the Caisse had to sell it, they'd get a deep haircut. They are basically the sole owner, they can mark it favorably but in reality, if they had to sell, they'd get clobbered."

Don't know if that's true but his comments made me very nervous because he knows quite a bit about CDPQ and its Quebec portfolio (doesn't work at CDPQ but is very knowledgeable).

Anyway, let's take a closer look at the weightings and returns of specialized portfolios:

As you can see, Real Estate and Private Equity make up 13% and 14% respectively of the total portfolio but the former returned 10.5% last year while the latter returned -2.7%.

CDPQ's real estate troubles are well known. In February, I wrote a comment on trouble at Ivanhoé Cambridge, the Caisse's massive real estate subsidiary, basically stating it wasn't right to blame Claude Sirois, its former President, Retail, but to also blame Daniel Fournier, its former President and CEO as well as Michael Sabia who jumped ship before this real estate disaster occured.

For a guy who prides himself on facing the music and being transparent, Sabia left CDPQ before the pandemic hit and didn't have to answer any tough questions on the blowup in the real estate portfolio (neither did Daniel Fournier!).

So when people tell me these two guys are as "tough as they come", I take these characterizations with a grain of salt because being tough is easy when you don't have to answer for your mistakes.

Don't get me wrong, Michael Sabia did a lot of great things at the Caisse but he also made plenty of mistakes and he needs to accept his responsibility at Otéra and Ivanhoé Cambridge.

The job of cleaning up the Caisse's real estate portfolio now falls under Nathalie Palladitcheff, the new CEO at Ivanhoé Cambridge. She too has some responsibility in what happened over the years but she wasn't in charge of the entire organization.

Now she is and she gave a good interview in La Presse today stating they want to sell a third of their malls and continue focusing on logistics properties. She said malls around the world should be less than 15% of their real estate assets but as of the end of last year, they represent 23%.

She also addressed concerns about office properties and how the new paradigm is working from home stating they invested in WeWork's platform for one of their Austin offices to maximize rentals and make it more flexible, but she is optimistic that people will return to offices based on what happened in China and France.

I'm less optimistic and think pensions betting long term on offices are in for a nasty surprise.

In a nutshell, here is my thinking which I discussed in my last comment on Blake Hutcheson:
  • Working from home isn't everyone's preference but it's here to stay.
  • Companies are looking to cut costs and improve productivity and renting large office space is questionable in a post-COVID-19 world.  
  • Giant tech companies hunting for talent are setting the new trend by allowing their employees to work from home indefinitely, and others will follow their lead or risk being left behind in the talent war.
  • Millennials prefer working from home but so do senior partners at law firms and accounting firms who don't want to be exposed to COVID-19.
  • There is a fundamental shift going on in terms of the nature of work, working from home will make it easier to hire more women, visible minorities and people with disabilities but it will also make it easier for big companies to offshore high-paying service sector jobs to India, China and elsewhere.
  • Working from home is much better for the environment, no question about it.
Of course, I might be wrong, until the second wave hits or another pandemic strikes, but I would be very careful betting too much on offices even if they are class A properties in primary markets, there's definitely a paradigm shift going on in real estate:

The revolution in work means you no longer have to live in an expensive city to do your job. That's why rents are plunging in San Francisco, on top of the fact that the bubble in venture capital is popping (about time!).

Anyways, I've covered a lot. Please take the time to review the documents below:
Also, take the time to read the a interview in La Presse today featuring Nathalie Palladitcheff, the CEO of Ivanhoé Cambridge. She's a very intelligent lady and even though she's more optimistic than me, she is very aware of the challenges that lie ahead and strikes a very balanced tone.

And keep in mind, some areas are seeing a pickup in mall activity, it depends where you're located:

If there's anything I need to add or edit, the folks at CDPQ know where to find me.

Below, Redfin CEO Glenn Kelman joins CNBC's Kelly Evans to discuss how real estate is being impacted by the pandemic and protests. Listen carefully to his comments, this is happening now.