CDPQ moves to a global stage
Caisse de dépot et placement du Québec (CDPQ) has grown from being an asset manager in francophone Canada to a green-conscious global player in infrastructure. Executive vice-president of infrastructure and president and CEO of CDPQ Infra Macky Tall talks to PFI about that growth. By Nic Stone.
The traditional gift for a 50th anniversary is gold. When Québec-based Caisse de dépot et placement du Québec (CDPQ) turned 50 in 2015, it sought out to make its own gold.
CDPQ was formed in 1965 by a law passed in the National Assembly of Québec. The group’s initial role was to manage the funds of the Québec Pension Plan, a newly-created universal retirement plan. For its 50th anniversary, CDPQ Infra was created as a new subsidiary to focus on the design, financing, development and operation of infrastructure projects.
In its 50 years, the Canadian institutional investor has expanded its horizons far beyond its native Canada and towards the end of 2017 closed a number of deals ranging from renewable energy projects in Mexico to highways in Colombia.
Macky Tall is responsible for CDPQ’s infrastructure investment strategy. In his role, he oversees the teams that carry out infrastructure investment activities worldwide. He is also in charge of CDPQ Infra and serves on CDPQ’s executive committee and investment-risk committee.
Tall joined CDPQ in 2004 as director of investment in infrastructure and accelerated the implementation of a business model focused on strategic partnerships with the largest infrastructure operators in the world, mainly in the sectors of power generation – particularly wind – airports and ports, energy transportation and distribution, highways and passenger transport, and social infrastructure.
With this approach, a portfolio valued at more than C$14bn (US$10.85bn) was built. His team’s expertise facilitated the implementation of a unique public infrastructure model, with the launch of CDPQ Infra.
CDPQ has recently set a short-term target to increase its investments in low carbon assets by more than C$8bn and a medium-term target to reduce its carbon footprint by 25% per dollar invested.
“In the wake of the Paris Agreement and changing consumer choices and technology, we are already seeing markets undergoing rapid change,” CEO Michael Sabia said at the time. “This new reality has prompted us to review the risk-return profile of several industries and companies. It will also create new attractive investment opportunities for our clients.”
In the short term, by 2020, the firm plans to increase low carbon investments by 50%, representing C$8bn. In the medium term, between 2017 and 2025, CDPQ commits to reducing the carbon intensity of its overall portfolio by 25%.
The strategy means CDPQ became the first institutional investor in North America to set a carbon target covering all of its asset classes. As part of the strategy, CDPQ will review the risk-return profile of investments and reduce exposure to the assets with the highest carbon intensity, such as activities related to coal. Beginning this year, it will disclose information and data on its portfolio’s greenhouse gas (GHG) emissions as part of its annual report.
And the group is looking to expand. CDPQ is aiming to grow its offerings in the US private debt market and is planning hires in both Montreal and London over the next year. CDPQ hired Robert Hetu in June from Credit Suisse, where he was a managing director in the investment banking department.
Hetu will be involved in sourcing US private debt opportunities and is expected to lead CDPQ’s efforts in that market. The team is expected to focus on more sizeable investments with C$100m positions or more in a single deal. It is all part of a strategy to put the firm at the forefront of what Macky Tall describes as an infrastructure gap that needs a lot of investment in a lot of places.
“As part of that mandate, we are in the process of making the business more global,” Tall tells PFI. “We are starting to invest into markets that have attractive long-term growth possibilities. The approach is to increase investment in less liquid assets, which is why we are growing significantly our investments in infrastructure, private equity, and real estate.”
CDPQ’s investment strategy in the infrastructure space also mirrors the group’s strategy when investing in companies, says Tall, which includes belief in the long-term fundamentals of a deal.
“A very clear part of our strategy in fixed income is to increase the percentage of our fixed income portfolio into private debt,” says Tall. “The US is one of our target markets, but our interest goes beyond the US.”
In the pursuit of that growth into other geographies, CDPQ recently completed a deal in Mexico that is emblematic of its strategy. The deal saw the company take an 80% stake in a portfolio of 1.7GW of renewable power projects in Mexico, alongside Mexican pension fund group CKD Infraestructura Mexico. Italian utility Enel was the original developer of the projects and has retained a 20% stake.
The deal is worth US$1.35bn, including US$340m for the equity stake and US$1.01bn in loans granted to the projects by CDPQ and CKD.
The plants will be funded with another roughly US$1.05bn of project financing to be sourced by Enel. The portfolio includes three renewable projects in operation and five under construction. Enel will continue to operate the plants under EPC contracts.
CDPQ is not involved in the debt raising for the projects, according to Tall, but the group has the ability to do that and it has played that role in other deals. The financing plan will see a separate financing for each project, rather than a portfolio deal.
The three solar financings will see the same group of banks commit to each deal separately, while the wind projects will be financed by two different sets of banks. The three existing wind projects won’t see new debt financing. The three solar debt packages are slated to close by the end of 2017.
The portfolio consists of three solar plants under construction – Villanueva I (427MW), Villanueva III (327MW) and Don José (238MW); and five wind facilities, of which three are already operational – Dominica (200MW), Palo Alto (129MW) and Vientos of the Altiplano (100MW), and two under construction – Amistad (198MW) and Salitrillos (93MW).
Enel will complete plant construction, finance the projects and continue operating plant management through two newly established subsidiaries. In addition, as of January 1 2020, EGP can increase its stake in a holding company in the deal, becoming a majority shareholder.
The assets are integrated into CDPQ’s investment platform launched in 2015 with CKD IM, a consortium of Mexican institutional investors. CKD IM is a group consisting of Mexican pension fund managers also known as Afores. It includes XXI Banorte, Afore SURA, Banamex and Pensionissste, as well as infrastructure fund Fonadin.
“We will select markets very carefully that provide us with a stable business,” says Tall. “That is a good example on how we approach opportunities in those countries. Enel was just the result of more significant effort upstream and we are developing a good strategy there.”
Tall says the group will only look at a very limited number of countries that have stable and robust regulatory regimes so that the investments don’t face increased volatility. They will then come to countries with expectations of long-term growth opportunities, which they see in the Mexican power sector.
When CDPQ partnered with the Afores to create a US$2.1bn fund to invest in infrastructure projects in the country it kick-started the process that sees it now investing in a renewable energy pipeline in the country. CPDQ contributed Ps17.876bn (US$960m) to the fund for a 51% stake, while CKD Infraestructura México put up the remaining Ps17.215bn for a 49% stake.
“We bring our experience of over 18 years of investing in various geographies, deal negotiation, and structuring,” says Tall. “And they bring a very local and in-depth country knowledge; they bring us the network, and that gives us access to a better quality pipeline.”
CDPQ has been quite active in setting up those local partnerships to leverage the benefits Tall describes. Also in Mexico, local infrastructure developer ICA and CDPQ formed a joint venture operational platform that owns the concessions for four of ICA’s operational toll roads and highways. The JV is known as ICA Operadora de Vias Terrestres (ICA OVT).
ICA transferred its ownership interest in the concessionaires for the four projects to ICA OVT. Under the terms of the transaction, ICA owns 51% of the platform and CDPQ 49%.
The company also plays quite extensively in its native Canada as well as in attractive and mature markets such as Australia. Despite not structuring the debt for the recent Mexico renewables deal, CDPQ played that role in the A$10.258bn (US$7.4bn) purchase of Australian poles and wires company TransGrid alongside its consortium partners. That deal was the biggest PF transaction in Australia in 2015.
Another country that has seen new activity from CDPQ is Colombia. The La Pintada Concession consortium, made up of Grupo Odinsa (78.85%) and Construcciones El Cóndor (21.15%), closed a roughly Ps1.3trn (US$430m) financing backing the Autopista Conexion Pacifico 2 highway project this November.
The deal closed across two tranches. The US$250m dollar tranche led by Banco Itau saw commitments from Banco de Credito del Peru with a US$50m ticket, Itaú Unibanco New York Branch with US$50m, and Banco Santander with US$35m. Once commercial banks had committed, institutional investors ING Capital with US$35m and CDPQ with US$80m jumped into the deal.
“This is the first time that CDPQ [from Canada] and ING [from the Netherlands] are [investing] in infrastructure in Colombia and chose Odinsa and the Pacifico 2 contract to enter this sector, which is very important for us, as there are two new actors in the country as funders,” Mauricio Ossa, president of Odinsa, said in the local press.
Being able to provide that long-term capital has helped the group get a leg-up in some of these jurisdictions, according to Tall. The strategy is to play in that gap that is left with banks tending to provide shorter tenors on debt.
“I think that actually it is part of creating that market,” says Tall. “CDPQ wants to be able to be part of that gap created by banks being less present and because there is an appetite for more private capital.”
Another type of deal that we could see more of from the group is like one in its native Canada, where it is partnering with the government and funding mega infrastructure works on the home front. The Government of Canada, the Government of Quebec, and CDPQ Infra unit have committed a combined C$1.2bn to the Reseau Electrique Metropolitain (REM) light rail network in Montreal. The total cost of the project was last estimated at C$5.9bn.
CDPQ Infra is the project owner and has confirmed a commitment to spend C$3.1bn. The province is contributing nearly C$1.3bn. CDPQ said late last year it would provide more than half the funding and the remainder would be contributed by provincial and federal governments with no additional financing necessary.
“On that project there have been many innovative parts to it,” says Tall. “For the period of construction we have made the decision to go on an unlevered basis, providing 51% of the equity capital, get through construction and after that optimise the structure. The ultimate objective for investment by governments is to be in non-voting shares, participate in returns and potential upside.”
It is a step into developing greenfield projects like this that Tall believes can also help fuel growth. “The Montreal project is the first one,” he says. “We want to execute that model which has developed with innovative financing structures.”
As part of the group’s green commitments, Tall sees renewables playing an increasingly large role in its portfolio. At the moment, renewables account for around 20%. It already owns stakes in Invenergy and Boralex.
It made a splash earlier this year with the debt-financing of a 25% stake in the 630MW London Array offshore wind farm. Nine banks joined a £500m loan to back the purchase, including BNP Paribas, Credit Agricole, EDC, ING, KfW IPEX, MUFG, Natixis, adviser Societe Generale and SMBC. Front-end fees on the 12-year deal were lower than the standard 150bp at 135bp, and the margin was in the 180bp to 190bp range.
London Array has a Dong holdco structure and the asset is built. The deal has not attracted, or needed, any institutional investors. Masdar raised a £469m loan on its 20% stake in London Array in 2013. CDPQ paid C$1bn (US$739m) for the stake in the summer of 2013. Dong, now renamed Orsted, has 25% and E.ON 30%.
“We have recently confirmed a strategy to address climate change as an investor and that is a strategy that covers our entire portfolio,” says Tall.