CDPQ looks for opportunities and partners in Latam infra
The participation of the infrastructure sector in the CDPQ portfolio is expected to grow in the coming years and opportunities in emerging countries tend to play a key role in this regard. In the case of Latin America, Mexico, Brazil, and Colombia are a natural focus, but the group is open to opportunities basically throughout the region, as long as they are adjusted to risk-return expectations. Local partners are fundamental, says
“Latin America is important for CDPQ. We have a good roll out in infrastructure that we are planning, notably in this region. We have developed good platforms in Mexico and Colombia, and we'd like to attract some other industrial partners and find good opportunities to invest,” he says. He will be a keynote speaker at the Infra Latin America GRI 2019, which is scheduled for May 16 and 17, in New York, and hopes his participation in the event will help foster partnerships and identify leads to invest in the region.
You joined CDPQ last year, in June, with the mission of being responsible for the group's global infrastructure strategy and investments. What have been the major challenges you have faced since then?
It is a big team that has been investing in infrastructure for a long time. I have spent time getting to know everything: the team (about 60 people) and our partners – they are very important to CDPQ, but my predecessor and the team had done most of the work developing strong partnerships –, and meeting the CEOs of the companies in which we invest. That has taken quite a bit of time because of the geographic complexity – Australia, India, Mexico, US, Canada and countries in Europe – and the diversity of topics, like energy, transport, and social infrastructure. One positive thing is that there was no big issue in the portfolio. It's a good and strong portfolio. It was basically an effort to blend in. Part of my job is to be at the executive committee of CDPQ, and that is where it gets a bit broader because we oversee a huge portfolio of assets [CAD 309.5 billion net assets at December 31, 2018] – and infrastructure is only a small portion of it (5% to 6%). We have private equity, real estate etc. Getting into these complexities was quite interesting. It is a big organization, we have good topics and we came out with a big commitment of reducing our carbon footprint, investing in more low-carbon assets. It is part of my job to promote our initiative because we want to make other people aware of what we are committed to do and help other organizations to set targets the same way we did.
As you mentioned, infrastructure accounts for about 5% of CDPQ’s portfolio nowadays (totaling about CAD 20 billion). How has this participation evolved over the years? Can we expect it to grow in the near future?
Yes, we can. Globally, there is a trend to have an asset mix with more illiquid assets – private equity, real estate and infrastructure. That is quite a trend and it makes a lot of sense because CDPQ is a long-term investor, and it matches really well with what the people of Quebec and their representatives are looking for. I have been meeting some of them and there is an appetite to invest more in infrastructure. For us to get in the trend, we need to increase our deployments in infrastructure. Also, over the last few years, we became more open to investing in emerging markets, and infrastructure is quite an important medium to invest in there.
"Over the last few years, we became more open to investing in emerging markets, and infrastructure is quite an important medium to invest in there"
At the end of 2017 (last data available), only 5 percent of CDPQ's infrastructure investments were related to developing markets. Has this participation grown since them?
We are reviewing the figures later this year, and they are going to increase significantly because of new deals and investments. We're investing in Enel Green Power platform in Mexico, and we have invested in Conmex [Concessionaire Mexiquense, which operates the 110-km highway Circuito Exterior Mexiquense, connecting Mexico City’s main access and exit points] with our partner [Australian institutional investment manager IFM Investors]. Besides that, we made two investments in India last year [CDPQ increased its stakes in Azure Power and invested in a subsidiary of CLP, formerly China Light & Power]. So, the figure is now more than 5 percent.
How attractive is Latin America when compared to other emerging markets?
It all has to do with the risk-return ratio, and it is really hard to compare India to Brazil, Colombia or Mexico. Our focus in the region is Mexico, Brazil and Colombia. This does not mean we will not look at other countries. Frankly, we are long-term investors, so we take one country, the geopolitical view and the structural view, and analyze the changes that happen there. To us, it is really important to have local partners investing alongside us in the assets. With that setup, we're very comfortable investing in Mexico, Colombia [although more recently] and, when it comes to Brazil, it is a huge economy and clearly another country in which we are happy to spend time and look at investment opportunities on a risk-adjusted basis. Everything is interesting if there is the right risk-return profile. One important thing, what I like in a big organization like CDPQ, is that we look at the risk in the overall portfolio basis, not only in the infrastructure portfolio.
Is it possible to elect a preferred country in Latin America?
We are looking at all of them. Again, it is a risk-adjusted basis matter. If we find a very good opportunity in Colombia, a very good opportunity in Brazil, and a very good opportunity in Mexico, we do all three. We don't have a preferred country. It is a matter of diversification. If at some point we have too much in a country as opposed to others, or too much in a region as opposed to the world portfolio, then we need to make some arbitrage not to be overexposed. But we are not at this stage yet.
"If we find a very good opportunity in Colombia, a very good opportunity in Brazil, and a very good opportunity in Mexico, we do all three. We don't have a preferred country. It is a matter of diversification"
What about infrastructure segments in Latin America? Is diversification also the key word?
The first key rule is that we want to diversify our risk. What we agreed with our partners in Mexico, in 2015, was to focus on energy and transport, and what we agreed with our Colombian partners is a full spectrum of infrastructure. In Latin America, some countries are clearly great places to do renewables. For instance, Colombia is now getting into auctions for renewable capacity. When it comes to roads, I don't see any issues. Water is different in each country; some are more open to having it in private hands, and some are not.
How did you see the recent elections in Latin American countries? Did the results change the investment environment?
Of course. We analyze the political landscape to determine our appetite to be in a country. We update it regularly, but we don't want to change our strategy every five years because of elections. The view that we take is that we decided to invest in these three countries [Brazil, Mexico and Colombia], although the deployment speed will depend on the political landscape, but we have a long-term perspective for every country and we invest for the long run. If you look at an infrastructure portfolio like ours, a lot of assets are exposed to political and regulation risks, so it is a matter of making sure that it is diversified.
To you, what is the importance of having offices and partners in the region?
I speak for the infrastructure area, but a lot of what I say can be extended to other asset classes. I don't like to invest in a country where I don't have people who understand the local situation. So, one of the easiest things to do is to hire people locally. It's not always possible – we don't have CDPQ people in every country. Right now, the heart of our infrastructure platform in Latin America is headquartered in Mexico City. We have a team of five to six people there, looking at the investment in the region, and we have a couple of people that are headquartered in North America which also cover the region. We don't have people dedicated to infrastructure on the ground in São Paulo or in Rio de Janeiro, so it makes partners even more important. Either we have people on the ground or, if we don't, we need partners. It gives me comfort about what is going on in the country, and helps understand the local market. In Colombia, we don't have people on the ground either. We have two to three Colombians on the team and that is already something. We also have a lot of Spanish speakers on the team, and now we have five local pension funds that help us bring know-how and local connections to make sure we don't take unnecessary risks.
"Either we have people on the ground or, if we don't, we need partners. It gives me comfort about what is going on in the country, and helps understand the local market"
What do you look for in a partner?
Especially when it comes to financial partners, we are very specific in the fact that we are long-term investors, and we need good alignment because you cannot have issues discussing exiting forever. People have different objectives and sometimes it is hard to reconcile them. We also need people to be like-minded in aspects as the carbon emission front. The second type of partner that we have are business/ industrial partners. What they bring us is technical expertise, which we don't claim to have. These are the two types of partnership we look for, harvest, and spend a lot of time nurturing and developing.
Since 2015, CDPQ and Grupo Sura have invested jointly in Mexican infrastructure projects and participated in the funding of other infrastructure projects in Colombia; and, in December 2018, CDPQ acquired a strategic minority interest in Grupo Sura’s subsidiary Sura Asset Management. Also, recently, CDPQ decided to co-invest (up to USD 510 million) with the Financiera de Desarrollo Nacional (FDN) and the Colombian pension fund administrators (AFPs) in a fund aiming to make capital investments in infrastructure projects and companies for a total amount of up to USD 1 billion. What can you tell us about these initiatives? What are the plans?
We are still looking at a few acquisition opportunities in the region for sure. Specifically, what we have in Colombia is a pension fund like-minded investor. We have got the structure in place so now we have dedicated, between FDN and partners, USD 1 billion to look for opportunities. That is the target. We have a similar structure in Mexico. The plan by 2015 was to deploy USD 2.4 billion to USD 2.5 billion in the next five years. In late 2018, we were already there, so it happened a bit quicker than the target. We did it in our Mexican platform, so there's no reason to believe we won't deliver in our Colombian platform. There is a good alignment of interests with FDN, and the country is full of good projects, so it is a matter of picking the best ones.
Besides Petrobras’ natural gas pipeline system, what could be of interest to you in the Brazilian infrastructure sector over the next 12-24 months?
We do not comment on rumors as a principle, but I can tell you that in Brazil we are looking at all the sectors, a few different opportunities, trying to find a good base to deploy renewable capabilities. In Brazil, there is no sector that I could say ‘I'm not looking into this one’. We don't have a huge team, so we cannot look at everything in parallel. CDPQ has not yet invested in infrastructure [in Brazil], but in real estate – with Ivanhoé Cambridge, and has just announced a joint-venture with Prologis. There is appetite for Brazil at CDPQ.
What is your expectation for the Infra Latin America GRI 2019? And what key topics will you talk about as a keynote speaker?
My message is that Latin America is important for CDPQ. We have a good roll out in infrastructure that we are planning, notably in this region. We developed good platforms in Mexico and Colombia, and we would like to attract some other industrial partners and find good opportunities to invest. So, I am open to pass a positive message on Latin America and on the interest of CDPQ for the region, and help foster some partnerships there and leads for us to invest. I also want to talk about the way we are thinking about the planet and how we want to make an impact in terms of low-carbon investments.
By Giovanna Carnio, editor-in-chief
Infra Latin America GRI 2019
will be a keynote speaker at the Infra Latin America GRI 2019, which takes place on May 16 and 17, in New York. The conference will gather the major infrastructure players active in the region to discuss challenges, trends and business opportunities. Get to know more.