No one could accuse Andreas Beroutsos of letting the grass grow under his feet.
The executive vice-president of private equity and infrastructure at Caisse de dépôt et placement du Québec (CDPQ), is now 15 months into a five-year plan to grow his illiquid investment pool from $30 billion to $50 billion.
One of Canada’s largest and most successful institutional investors in a country of sophisticated LPs and GPs, Montreal-based CDPQ is one of the 10 largest private equity fund and direct investors in the world. It is also celebrating its 50th anniversary this year.
For Beroutsos, however, the current focus is very much on the next three and a half, as he looks to reach his target by successfully deploying up to $8 billion per annum into private equity and infrastructure, through a combination of direct investments and funds.
The role was initially proposed to him informally by Michael Sabia, CDPQ’s chief executive, two years ago, after a mutual friend who was on Beroutsos’ company’s advisory board recommended him.
At that point, Athens-born Beroutsos had already built up a successful global private equity practice at McKinsey & Company, before leading the private equity team at Eton Park Capital Management.
He then struck out on his own to found One Point Capital and Navigos Capital, and had raised commitments of $320 million when Sabia came calling.
His predecessor at CDPQ, Normand Provost was retiring after more than three decades at the helm and Beroutsos was immediately attracted to the possibilities of the new role.
“I was told, ‘You have the opportunity to run a $30-plus billion portfolio that we’d like to grow to $50-plus billion over the next five years.”
It was, he says, “a formidable combination”, namely being able to arbitrage all the resources of a large institution but with the entrepreneurial promise of being able to affect real growth – the main reason he had set up his own firm in the first place.
When he arrived, he had around 50 people in his team, but he is looking to grow that to more than 100 over the next four years. Key recent hires have included Chris Puscasiu, formerly a partner at EQT, as co-head of PE direct investing in the New York office, and former Charterhouse partner Stefan Etroy, who has taken on the same role in London.
Recruiting the right people is, he says, the most challenging but also the most crucial aspect of the job.
“My primary challenge, is to recruit the right high-quality people, and help them integrate well within the firm and with each other.
“We leverage the investing and management capabilities of our entire firm, from private equities and public equities to credit and real estate, and in doing so, we try to think like owners.”
Beroutsos says the firm’s historic track record in illiquids has “given it the right” to grow that mandate at such a notable rate. After all, he points out, the proudly Francophone firm was making direct investments before several of its large Canadian peers even existed.
“CDPQ has been investing in private equity for several decades, with good results, so it has developed substantial experience.”
Beroutsos is adamant that CDPQ is not a pension fund, nor an LP, considering it runs more assets as a GP than it backs as an LP.
“We are not a pension plan, but rather a long-term institutional investor that manages funds on behalf of 33 clients, including pension plans, insurance companies and other long-term money.”
As of 30 June 2015, CDPQ managed $240.8 billion of assets, with 35 percent in fixed income and another 35 percent in equities. Real estate makes up another 10 percent through CDPQ’s third division, Ivanhoé Cambridge, and Beroutsos’ private equity and infrastructure division makes up the remaining 15-20 percent.
The first half of the year has seen its combined assets return 5.9 percent versus its benchmark’s 5.2 percent, while over four years to 30 June, annualised returns were 10.2 percent versus 9.7 percent by the benchmark.
“Two-thirds of CDPQ’s balance sheet is invested in liquid markets but because of our long-term horizon, it is willing to take on the duration and illiquidity risks.”
That focus on a long-term investment horizon is undertaken on behalf of its 33 clients, a mix of Quebec-based private and public pensions, insurance plans and endowments, which make up over 97 percent of its assets.
Together they have sanctioned an increase in illiquids exposure as they try to match their liabilities at a time when other asset classes continue to look unattractive in relative terms.
While Beroutsos cannot give absolute numbers, he says strong private equity returns have been produced “despite a portfolio which carries substantially less debt than the typical private equity portfolio”. He does, however, reveal enough to indicate that the overall private equity portfolio has a six-month return in the “7-8 percent range”, while the four year annualised returns are comfortably in the “mid-teens”.
LBOs make up around half of the $23 billion private equity portfolio, which is currently invested 55 percent direct and 45 percent through funds. The returns are perhaps all the more impressive given that the private equity portfolio’s debt-to-capital has hovered at around 35 percent – much less than the 55-70 percent of the typical PE/LBO investment, he says.
The $12 billion infrastructure bucket is “mostly direct”, and includes the March 2015 acquisition of 30 percent of the British government’s 40 percent stake in Eurostar. The UK investor Hermes took the remaining 10 percent to make the deal more palatable for the UK. Reports say the group paid $850 million, while the whole transaction including debt was reported at $1.18 billion.
CDPQ’s infrastructure deals currently number around 25, and also include Heathrow Airport and the Port of Brisbane.
While the private equity bucket is a mix of “direct investments, co-investments and fund investments”, directs and co-investments take up the lion’s share of Beroutsos’s time, and have produced the best returns, outperforming the fund investments over a four-, 10- and 15-year timeframe, although “both have done well”.
He adds pointedly: “A few of our peers are in the same situation, but many are not.”
The sheer weight of money at his disposal, however, means funds investing will remain a significant part of the portfolio with Beroutsos “seeking a more productive way to work with funds”.
Despite the outperformance of the direct investments, Beroutsos stresses he will never go as far as some of his Canadian peers in that direction. Recently, OMERS’ head of Europe, Mark Redman, told Private Equity International that his firm intended to be at 90 percent direct for its private equity model within the next five years. For Beroutsos that prospect is less attractive, and also comes with its own dangers.
“Theoretically, it is possible for the largest five or seven LPs to invest 90 percent of their capital directly, but it is very challenging to do that long-term without replicating the infrastructure that the largest PE firms have and at the right quality level,” he says.
“People who embark on that journey may find it more challenging than they think.”
Beroutsos chooses his words carefully: “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.”
For CDPQ, the way forward is to execute minority deals, in contrast to some other large GPs who he believes are looking to emulate the control deals of the biggest US buyout firms. Becoming a majority owner by virtue of investing alongside one or two other like-minded groups is the preferred approach.
“Many private equity firms, as well as some of our peers, prefer control investing. Our model can be characterised as influence at a discount rather than control at a premium.”
While he “has a deep respect for what the leading private equity firms have accomplished” he is determined that CDPQ will stick to its own path.
“We don’t define who we want to be by looking to what these PE firms have accomplished.”
Still, from time to time, he says, his firm will come up against some of the mega GPs, both as a client and as a competitor. It is a “constructively symbiotic relationship”.
“We are in the business of achieving attractive risk-adjusted returns. As we try to generate such returns, some of our investments will look like Blackstone’s or KKR’s, alongside those firms, but others will not.”
CANADA IN FRONT
The recent storm over CalPERS’ and CalSTRS’ reporting issues and subsequent US pension plan demands for more clarity from GPs on fees is not top of Beroutsos’ list of concerns currently as he believes the scale of his organisation, along with its strong network of institutional relationships forged over a number of years, has made fees less of an issue than for many others.
“My three to five key priorities for this year do not include fee transparency, as we believe we are already getting this as an institution. But I know that matters a lot to many of my peers.”
He agrees that the relative success of the big Canadian institutions is at odds with many of the institutions on its southern border.
It is the ability to define and execute strategy relatively unencumbered by state and regulatory restraints that has helped many of the Canadian firms to succeed, he says.
“We manage on a long-term horizon. In some countries, pension funds are subject to the vagaries of short election cycles and electoral appointments. CDPQ, and most Canadians, don’t typically have that concern.
“In many public pension funds in the US and other countries, there are strict investment silos. We don’t normally have that stark separation.”
He cites the $8.7 billion deal for Petsmart, according to Bloomberg the largest US buyout of 2014, as a case in point. Most US institutions would struggle to match the resources behind the disciplined due diligence that went into the ultimately successful BC Partners-led deal. CDPQ participated by investing $300 million into the deal, with a smaller amount invested into its tradeable debt.
“Very often, we invest in equity, while our fixed income team buys a chunk of the debt and gets involved with the debt’s price discovery in the market.
“We staff our private equity deal teams with investment professionals from public equities, fixed income and public market research, in addition to private equity professionals. All that brings different degrees of expertise on industry sectors, geographic markets, transaction structuring and price discovery. Can you imagine the power of that?”
Beroutsos says the “only constraint” on Canadian asset managers, is that they can normally buy no more than 30 percent of any company.
The sheer size of the group in terms of assets under management, allows it to maintain a large team that smaller investors could not afford, and to compete strongly in the market for the best investment talent.
“It works because we operate at scale, so our people can be rewarded appropriately while at the same time our cost as an organisation is less than 20 basis points [of total assets].” For fiscal 2014, operating expenses and external management fees amounted to 16 basis points of average net assets, placing CDPQ firmly among the leaders in its management category.
Beroutsos thinks there are “probably fewer than 10” firms with the history and capabilities to do well today in terms of direct investing. “Having Western standards helps, along with global size, history and clear modus operandi.”
He includes Singapore’s GIC and Temasek in the “five to seven” that have the “history and professionalism” as both have incorporated a Western governance model, as well as having a long-term track record in investing similarly to some of their large Canadian peers.
He believes a handful of large Australian, Norwegian and Dutch institutions may also be on their way to joining them.
Often CDPQ will work alongside the five to seven. Last year’s Hutchison deal in the UK saw the group combine with ADIA, CPPIB, BTG Pactual and GIC to acquire O2 from Telefonica.
CDPQ put up £300 million out of the £3.2 billion deal – roughly the firm’s average stake for such deals. Brazilian group BTG’s inclusion was down to the fact the transaction team was formerly at Ontario Teachers, another “excellent” firm, he says.
“We invest alongside them. We all know each other well, but [all] have slightly different skills and strategies.”
In private equity, the $23 billion is invested in three dozen companies and three dozen funds. The average company size ranges from around $100 million to $1.5 billion with the mode being a commitment of between $200 million and $300 million.
Since his arrival, CDPQ has made a dozen investments, ranging from leveraged buyouts to growth capital investing. Over the past year, six have been in North America, a handful in the UK, France and Germany, and one in Latin America. The only place CDPQ has not invested is Asia which, as he told PEI’s Hong Kong Forum in May, frustrates him, but is far too important to ignore.
“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.”
In emerging markets the group is focusing on growth markets – and opportunities in Brazil, Mexico, India and China in particular. CDPQ plans to open an India office soon and already has working offices in Beijing, Singapore and Mexico.
“Unlike some of our peers we are not going to deploy dozens of people in those offices. We will deploy small, lean coverage and execution teams that can draw on the firm’s resources to affect a global execution.”
The main reason why he is happy not to overpopulate these new offices is the growing globalisation of the deal process.
“When I began my career, things were different. In the past five years, in most geographies, any sizeable deal will find you if you are the right partner. Fifteen years ago, you would not hear about deals of a certain size in Malaysia or Hong Kong, but today you would.”
Beroutsos is on the hunt for contrarian opportunities and is extremely averse to “following the herd”.
“We like countries or sectors in transition. We try to avoid short-term cyclical plays where we don’t have an angle to add any value.”
Sectors in countries where regulation is unpredictable or unfriendly to business are also off limits but while coy about revealing precise details of target deals, he admits that energy is one area of significant current interest.
“Everyone thought the recent dramatic decline in the price of oil would have gene-rated significant investment opportunities by now. The reality is that very little has come to market to re-finance so far. Those that have already come have been poorer quality because they were the ones closer to the edge.”
Beroutsos reveals that “a substantial Asian firm” approached CDPQ recently to propose investing alongside it on an undisclosed but major US venture. That trend has been more prevalent in terms of the infrastructure portfolio.
“Most corporates and most governments don’t have the ability or the cash today to pursue interesting projects on their own. And even when they do have the ability, be it a family or a company, they usually like to share the risks with long-term investors like us.”
Beroutsos is also relaxed about the widely-held view that forecasts declining returns for the private equity asset class going forward.
“There are a lot of smart people in this industry. They are always able to adjust. The reason private equity remains attractive is because of relative returns. Return forecasts for public equities and fixed income are becoming further compressed.”
His optimism also spreads to CDPQ’s future role within the sector as he continues to seek to allocate his billions.
“We are at a unique moment in time where the few institutions with the size of balance sheet, the time horizon and the capabilities to execute smart transactions will emerge as important players in the private equity landscape.”
Being part of an established Canadian institution with a three decade track record in PE investing is also a major plus point, he says.
CDPQ will be hoping Beroutsos’s enthusiasm for the plan and team he is shaping, and the “palatable capital” he is seeking to deploy, continue to fire him.
If they do, it would be hard to bet against CDPQ remaining a suitable ally – and sparring partner – for the biggest private firms for many years to come.
FIVE RECENT CDPQ DEALS
Co-investors: BC Partners (lead) CDPQ, GIC, Longview.
CDPQ investment: c$300 million (same as the others) plus a “smaller but still significant amount” in its tradeable debt.
The BC Partners-led consortium saw off competition from Apollo Global Management, and a combined bid from KKR and CD&R, to seal the $8.7 billion deal for the fast-growing US pet retail chain. Beroutsos recalls the competitive nature of the bidding process in which CDPQ was ultimately successful.
“It was a little like the gun-fight at the OK Corral. Basically the extra 25 cents wins the deal.”
CIRQUE DU SOLEIL
Co-investors: TPG, Fosun, CDPQ, Guy Laliberte.
TPG (lead) and Fosun representing around 80 percent, CDPQ (10 percent) and Guy Laliberte 10 percent (the founding shareholder, who owned control until he sold majority in this deal).
CDPQ was able to leverage its Quebec heritage for the Montreal-based circus group.
“Our presence in the deal was the one thing that made the sale feasible. We are working very happily with Fosun and TPG to help it expand globally.”
June 2015 (new investment – first one was in 2011)
LBO investors: CD&R (lead), Ardian and CDPQ.
CDPQ was the anchor investor in the recent IPO of French engineering group SPIE, increasing its governance by adding a board seat. At the IPO, it invested an additional €100 million (around 20 percent of the IPO), and its stake is now worth approximately €300 million.
“A company growing by consolidating in the engineering sector in Europe. It went public last June effectively to delever. With the lower leverage I don’t expect the same spectacular returns going forward.”
Co-investors: Tarpon, CDPQ, QIA.
The whole transaction was in excess of $1 billion, with CDPQ taking a “meaningful” minority stake. “It was a take private from the largest for-profit education company in Brazil. The company had less than two times cashflow in terms of its debt. Unlike an LBO, we did not add debt to the company because debt is so expensive in Brazil.”
HUTCHISON (THREE UK)
acquiring O2 from Telefonica
Co-investors: ADIA, BTG Pactual, CDPQ, CPPIB, GIC.
Total amount £3.2 billion, with CDPQ contributing c. £300 million.
BEROUTSOS ON TWO MARKET CONCERNS
The dangers of co-investment
The huge growth in co-investment in recent years is an issue that may come back to haunt the sector if the cycle turns, Beroutsos says. And firms are looking purely at the economic benefits of co-invest while ignoring the potential for things to go wrong in the future.
“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’.”
Leverage in the middle-market
While Beroutsos does not see a huge problem with increasing levels of leverage in the more regulated large cap sector that CDPQ mainly operates in, he says leverage is becoming an issue once again in the middle-market.
“I have been surprised by the number of mid-market deals that have come to us in recent months at seven or eight times debt-to-EBITDA.
“In the large-cap space, debt is already capped by regulation at just above six times, but it is ticking up fast in the unregulated middle market, often reaching seven to eight times.”