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Caisse: A Bridge to Québec's Future?

Submitted by Leo Kolivakis on 11/04/2010 21:42 -0400

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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Wed, 11/10/2010 - 06:40 | 715717 cheap uggs for sale

Fri, 11/05/2010 - 11:16 | 702653 sethstorm

So basically, Quebec is selling itself to be a Third World whore, losing all of what it is to be Quebec?

Or is there something about whoring themselves out that preserves Quebec?

Fri, 11/05/2010 - 13:52 | 703183 CPL

They are probably winding up to secede again and the Caisse is getting ready to move into place to make sure anyone in Quebec is under the bank boot.

Not unlike 92 when the Caisse was deep pockets for Parizeau and the rest of the hacks trying to leave without paying their bill.

Fri, 11/05/2010 - 08:28 | 702189 Grand Supercycle

Daily and weekly overbought charts are now at an extreme level. Similar extreme conditions were detected before the correction started in mid 2007.

http://stockmarket618.wordpress.com

Fri, 11/05/2010 - 08:22 | 702150 Mercury

I've been developing a bit of a bullish-Canadian thesis lately and there seem to be three major themes in support of this case:

1. Inflation -The US is now totally committed to inducing inflation and will almost certainly overshoot the mark in some (and probably very serious) way. Other countries are thus drawn into a game of currency chicken whereby they either devalue too or kill their export industry. However this all plays out - commodities, natural resources, agriculture, oil and energy all go up in price and this plays to Canada's advantage.

2. Emerging Markets - If most of the world's economic growth is going to be coming from places like China, India and other developing countries, there will be much more organic demand for everything mentioned above in point 1.

3. Comparative Stability - Although everyone has pension and entitlement issues these days Canada seems to have a government in relatively sound financial shape or at least the sovereign CDS market has been holding them, along with Germany in higher esteem compared to other developed Western countries. Also, Canadian banks were much more prudent and largely avoided the sub-prime sirens compared to their US counterparts.

Am I way off base here or missing something big?

There seems to be a Quebec and the rest of the world outlook to Sabia's presentation and I'm surprised he doesn't make a larger case for Canada as a whole (what was that about Anglo/Franco harmony again?). Obviously Quebec isn't as natural resources-focused as other parts of Canada but I think many investment prospects seem more promising in Quebec's own backyard (from a risk/reward perspective) than what turning over rocks on the other side of the world might yield.

Fri, 11/05/2010 - 07:27 | 702129 YHC-FTSE

Interesting read. Reminds me of some strategic management case studies I read when I was in college. Thanks for the info about Caisse, and sorry to read about your MS.

Fri, 11/05/2010 - 03:10 | 702041 ZeroPower

Interesting post.

I was always under the impression the Caisse is full of 3rd tier employees making poor choices.

Perhaps this new CEO is bringing change in the right direction.

Fri, 11/05/2010 - 01:20 | 701977 KillerCoke

Thank you

Caisse: A Bridge to Québec's Future?

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