CDPQ’s infrastructure portfolio moves forward betting on growth in the Middle East

The investment team overseeing the C$45 billion infrastructure portfolio of Caisse de dépôt et placement du Québec, CDPQ, which has already tripled since 2016, is now targeting C$75 billion in assets under management by 2025.

In a dynamic strategy, the CDPQ deliberately seeks significant direct investments in new geographical areas where returns come from the growth of the underlying companies.

Last year the portfolio returned 14.5%, its highest absolute return in a decade and outpaced its peers by injecting a record $11 billion into transportation, energy and social assets and telecommunications, but there is still a lot to do, explains Emmanuel Jaclot, vice-director. President and Head of Infrastructure in an interview from the CDPQ’s head office in Montreal. “We have a lot of capital to deploy.”

crown jewels

The latest addition to CDPQ’s infrastructure portfolio, a 22% stake in Jebel Ali Port, Dubai Free Zone and National Industries Park, shows the skills Jaclot’s team now possesses. Rather than waiting for these crown jewels to be offered for sale and tendered through a competitive process, CDPQ’s close relationship with port operator DP World through existing co-investments in global assets, including a container port and logistics park in Indonesia, meant the team knew the state-owned logistics giant was looking to refinance its debt.

The CDPQ’s negotiation on the price and the conditions aimed in particular for the transaction to include a stake in the port and the logistics zone. While working to ensure that the transaction was not open to other investors and remained with the CDPQ to lose.

“We have proposed a structure where we take a stake in the port and logistics area. At any time, they could have opened the process to other investors, but we managed to maintain a two-way discussion,” explains Jaclot. “It is significant that they have allowed a foreign investor to invest in their home base which is such a strategic part of Dubai’s economy.”

Debt versus equity

The $5 billion deal includes a $2.5 billion equity investment and $2.5 billion debt in a balance, says Jaclot, who was key to the process. In particular, keeping leverage levels low enough to ensure the operation remains investment grade and low risk in a rising rate environment.

“The more debt you manage to raise, the better the return on equity, but that also increases the level of risk, and we like to keep the level of risk low in our infrastructure portfolio.” Speed ​​of execution in the recently completed debt syndication, important in today’s market environment, was also critical.

The investment also reflects the key logic that now drives infrastructure investments at the CDPQ. The port’s economy, revenue and margin, are uniquely tied to Dubai (Jebel Ali facilities account for almost a quarter of the emirate’s economy) and the wider region, which are expected to perform well in the coming years, spurred by factors such as the strong recovery from the pandemic and, more recently, the increase in the number of Russians seeking financial refuge in Dubai.

Most of the imports entering the port are for domestic consumption and industrial processes in the UAE and neighboring countries, says Jaclot. “Our investment is generally correlated to the GDP of an area that stretches from South Asia to Africa, and we believe there are strong revenues and profits there. The region will have a slightly different growth path over the next few years compared to America and Europe.

Larger portfolio

The Caisse’s infrastructure portfolio plays a key role in offsetting the impact of rising inflation. A good portion of contracted assets include inflation indexing while other regulated assets also include forms of inflation indexing. The portfolio is also protected from rising rates and the cost of debt, he explains. “Fortunately, in most cases we have fixed or swapped interest debt, so we are not affected by rising short to medium term interest rates, until we are able to refinance. Net -net, inflation is not detrimental to the portfolio and the Caisse wants to invest more in infrastructure.

CDPQ tends to target deliberately large transactions that are less competitive than the mid-market space, and is busy expanding into new geographies (the investment in DP World was its first in the region), including the Latin America, while teams in India, Singapore and Sydney are looking for opportunities.

Importantly, the portfolio is also growing through the growth of the underlying portfolio companies as they build and develop new projects. A process embodied by the CDPQ’s investment in companies such as the fast-growing American renewable energy developer Invenergy Renewables. “We like to reinvest cash flow and create value within our portfolio companies,” says Jaclot.

The focus on regions relies on the ability to scale investments and a local presence. For example, recently acquired transmission assets in Brazil, Uruguay and Peru are managed from the Sao Paulo office, while opportunities in Indonesia are managed from Singapore. “We’re not a huge team, so we can’t be too spread out, but it’s essential that our teams are close to our assets,” he says.

Decarburization

Portfolio decarbonization is another core element, integral to CDPQ’s original goal of reducing emissions across its C$419.8 billion portfolio by 25% by 2025 related to offsetting. , since expanded to aim for a 60% reduction by 2030. This ambition, closely watched by the carbon grain counters of the actuary and accounting teams, has fallen on the shoulders of the infrastructure department via growing exposure green renewable assets. “We’ve been ahead of the curve; we entered renewables early and ahead of the market with higher valuations,” says Jaclot.

Rather than selling – and choosing not to buy – carbon-emitting infrastructure, la Caisse has embarked on a slightly different path. Last fall, it created a $10 billion transition envelope to support the decarbonization of key carbon-emitting industrial sectors. “I would much rather hold or take ownership of the asset and decarbonize it. We could sell our CO2-emitting assets, but someone else ends up buying them,” says Jaclot. News regarding assets purchased specifically to decarbonize will be announced shortly; elsewhere, the fund has shut down coal-fired power plants and replaced generation with gas and solar in concrete decarbonization.

Yet the challenge of decarbonising infrastructure like airports (CDPQ owns a 12% stake in London’s Heathrow alongside others including USS, GIC and China Investment Corporation), given that most emissions come from aircraft , is increasingly in mind. “North of 95% of emissions at most airports come from aircraft, but humans need to meet and travel to some degree. We strive to find solutions, even if they have a higher cost, such as sustainable aviation fuel. Heathrow is at the forefront of this initiative.

Investing with DP World also purchased CDPQ’s commitment to ESG S&Gs under scrutiny. The company drew widespread criticism when it laid off 800 Britain-based crew members from its P&O ferry business. “To be frank, the news from the P&O Ferries workers made us search even deeper for reassurance and we were heartened by the reaction,” he said, noting the subsequent settlement DP World reached with the workers. . He is also encouraged by the growing diversity of DP World’s workforce and improving health and safety within the business.

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