Private equity investors need to more aware of a potential economic downturn and invest accordingly, according to Caisse de dépôt et placement du Québec‘s head of private equity.
Speaking to Private Equity International about the Canadian pension’s $400 million investment into UK-based insurer Hyperion Insurance Group last week, Stephane Etroy said the lack of visibility as to what could trigger a downturn or recession was “concerning”.
“Investors are focusing on the fact that earnings of listed companies are still very solid,” Etroy said, citing markets climbing higher amid uncertainty in the US, Brexit and Germany’s federal elections in Europe, and tensions in the Middle East and North Korea.
“There is almost a denial as to what could possibly go wrong,” he added.
This year the C$286.5 billion ($223 billion; €189 billion) pension fund has invested in five private equity deals in Europe, four in the US and at least three in Asia, Etroy said. The acquisition of a minority stake in Hyperion, which it obtained through mainly a primary issuance, marks CDPQ’s fourth private equity deal in the financial institutions sector.
Direct investing allows the pension to be more selective about the types of assets it believes will fare better amid a potential downturn, Etroy said.
“By investing directly into companies, we choose different type of assets and partners very carefully and we diversify away from standard private equity transactions,” he said. “We’re trying to stay disciplined on companies that are well diversified geographically or by sector, to try to reduce risk from the current environment, which lacks visibility while the markets keep on going up.”
CDPQ had C$30.4 billion in private equity assets representing around 11 percent of its portfolio as of 31 December, according to its website. It typically takes minority equity stakes in companies between C$125 million and $1 billion.