CDPQ: co-investment may come back to haunt industry

The huge growth in co-investment in recent years is an issue that may come back to haunt the industry if the cycle turns, Caisse de dépôt et placement du Québec (CDPQ) executive vice president of private equity and infrastructure Andreas Beroutsos told Private Equity International.

Speaking exclusively to PEI, Beroutsos noted that some firms were only looking at the economic benefits of the arrangement and ignoring the potential for things to go wrong.

“We will only know how well these have fared when the water recedes. We are already high in the current cycle, and people are taking risks they were not taking three to five years ago. And it’s because they feel more confident. Some people doing co-investments are doing so without the relevant teams. They often see that a big private equity firm has already underwritten the deal, so they say ‘it must be safe’,” he said.

Private equity and infrastructure accounts for 15-20 percent of CDPQ’s $240.8 billion of assets, as of 30 June. LBOs make up about half of its $23 billion private equity portfolio, which is invested 55 percent in direct and 45 percent in funds.

Its direct investments outperform its funds over a four, 10 and 15-year time frame, Beroutsos noted. The PE portfolio generates a six-month return in the range of seven to eight percent, and an annualised four-year return in the mid-teens, he said.

“If the direct investing has done better than the fund investing there is the temptation to do more of it and stretch a lot further. But you have to have the wisdom and the clarity of mind to not go too far,” Beroutsos said.

CDPQ plans to grow its illiquid investment pool from $35 billion to $50 million over the next three and half years, Beroutsos told PEI. The fund seeks to deploy up to $8 billion a year in direct and fund investments across private equity and infrastructure.

Beroutsos, who had a team of 50 people when he joined CDPQ 15 months ago, plans to expand that to 130 people over the next four years.

The firm is planning to open offices in Mumbai and Singapore next year. The fund has yet to invest in Asia.

“It is a very important priority for me to be present there for both knowledge and capital reasons. We have looked at dozens of deals in Asia and it has to be the right governance and risk/reward ratio. The PE industry over there is still maturing,” Beroutsos said.

Look out for PEI’s full interview with Andreas Beroutsos, which will appear in the September issue.