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On April 22, 2016, Caisse de dépôt et placement du Québec made a striking announcement. The Montreal-based investor, which has managed public pension and insurance assets since 1965, revealed ambitious plans to build, own, and operate a C$5.5 billion ($4.2 billion), 42-mile, 24-station light-rail system in its home city. What’s more, the pension manager unveiled an innovative scheme to pay for the project: Rather than follow the usual infrastructure financing road map, in which public pension funds and established infrastructure managers invest together in, say, an airport or a highway, Caisse, with C$255 billion under management, would invest a stunning C$3.3 billion of its own assets in the rail system, with the rest of the money coming from the province of Quebec and the Canadian federal government.

“It’s never been done before,” Caisse CEO Michael Sabia says of what he calls a public-­public partnership. It is also the debut project of new Caisse investment subsidiary CDPQ Infra, which was designed to follow the lead of the pension manager’s real estate unit, Ivanhoé Cambridge.

The bold move is the latest in a series of major overhauls enacted by Sabia since he joined the pension in March 2009, after the global financial crisis had blown a C$40 billion hole in the pension manager’s portfolio — a full quarter of its assets. Desperate for a turnaround, then–Quebec premier Jean Charest charged Sabia with transforming the fund into an investment machine that could withstand market shocks. The move was both audacious and unpopular, as there had never been a native-­English speaker leading Caisse and Sabia did not have an asset management background. But the new CEO, who is fluent in French, was undaunted and immediately put an ambitious plan into place that included firing both employees and external asset managers, simplifying an overly complex portfolio, changing the organization’s culture and mind-set, and restructuring its three real estate subsidiaries.

The launch of CDPQ Infra is the latest manifestation of Sabia’s vision. Although Canadian pension funds, such as the Ontario Teachers’ Pension Plan and the Ontario Municipal Employees Retirement System, are well known for directly copurchasing highways and rail lines — including the 68-mile rail link between London and the Channel Tunnel — these are so-called brown-field investments: They target buildings, highways, and ports that have already been built and need rehabilitation. None has taken on a large, start-from-scratch green-field building project because of the risks of such an undertaking. “I would say it’s pretty rare,” agrees Yvan Breton, a partner in Mercer’s Canadian wealth management business and the firm’s head of fiduciary management in Canada.

It’s also risky, some experts say. “It’s a very complex and hazardous asset class,” warns Roger Urwin, global head of investment content for advisory firm Willis Towers Watson. He estimates that global infrastructure investments total between $500 billion and $1 trillion. Only 3 to 5 percent of the world’s pension funds regularly allocate to the asset class. And as the world’s largest pensions join infrastructure managers in seeking the best opportunities, the field is getting crowded.

Sabia sees it differently. For starters, he believes — as do many in the investment world — that in the future traditional equity and bond markets will not deliver the returns necessary to fund pension liabilities. “More and more, you just want to take asset risk,” Sabia says. “Markets aren’t going to pay much, despite the effervescence in the market post-Trump.”

More important, Sabia’s decision to step up infrastructure investing and create a subsidiary business to build, own, and operate projects was born of his deep conviction that operations are a source of value. Unlike most pension fund executives, who typically spend their careers in pension management or on the asset management side, Sabia served as CEO of Bell Canada International and CFO of Canadian National Railway Co., and that experience contributed to his belief in the importance of building long-term asset value rather than reaping short-term investment returns.

“You have to treat the principles of investing like an industrial company,” he asserts. “It’s in the operations that you create durable value, not with financial engineering.”

Sabia has spent his career putting his philosophy into action. He was born in St. Catharines, Ontario, in 1953, and earned a BA in economics and politics from the University of Toronto and graduate degrees in economics and politics from Yale University. After working for the Canadian government as a senior official in the Department of Finance and the Privy Council Office, he joined government-owned Canadian National Railway in 1993 and worked his way up to CFO. He facilitated a financial turnaround at the company and helped take it public in 1995.

In 1999, Sabia left for Bell Canada, the country’s largest communications company; in 2002 he became CEO of its parent, BCE, where he faced a different challenge: The telecommunications business needed to change its approach to the double threats of cable and the Internet as the dot-com bubble was ending.

Sabia’s tenure at BCE came to an end in the heat of a takeover battle between Ontario Teachers and U.S. private equity firm KKR & Co. for control of the company, which the pension plan eventually won. In 2008, Sabia’s job became a casualty of the power struggle between the investors, but he walked away with a cool $21 million bonus.

The timing was fortuitous. By early 2009 the devastated Caisse, whose assets had sunk to C$120 billion, needed a new CEO. After province premier Charest tapped Sabia for the job, the appointment was officially made by the board of directors and ratified by the Quebec government. It was then that Sabia embarked on one of his biggest career challenges yet.

Just days after joining Caisse, Sabia stood in the soaring, glass-­enclosed atrium of the pension manager’s headquarters and addressed his new employees, who had been badly shaken by the fund’s losses. “The lack of sense of pride inside the building was terrible,” recalls Macky Tall, CEO of CDPQ Infra. “Employees, who were traditionally proud to work here, were almost ashamed to say they worked here.”

Sabia broke the ice by saying he needed then–U.S. president Barack Obama, a gifted speaker, to help him find the right words for the occasion. “I’ve done other things, but this is the biggest hour of my career,” Sabia told the employees. “The Caisse is a great place filled with great potential, and that’s why I am here.”

The new CEO drew inspiration from Caisse’s headquarters, the Parquet, a cathedral-­like modern structure built in 2003. “The space symbolized the potential of the institution that had lost C$40 billion,” he explains. “It symbolizes ambition, what we can accomplish.”

Sabia needed plenty of inspiration as he set out to rebuild the once-­revered pension manager. He’d taken over an organization that was managing the assets of 25 mostly public pension funds (it now manages 34) and insurance plans. The largest of these are the Government and Public Employees Retirement Plan, Fonds d’amortissement des régimes de retraite, Fonds du Régime de rentes du Québec, and a pension plan for the Quebec construction industry.

He faced tough challenges at the outset. “I remember quite vividly a day in late-April 2009 when I had to tell five members of the executive committee that they didn’t have a future here,” he says. “Senior people had to go. It’s very rare you can get someone to do something differently.”

And Sabia definitely wanted his senior people to do things differently, building on his philosophy of creating long-term asset value. First and foremost, he asked employees to start “investing like an owner” and to see their roles as “builders, not traders.”

Because he believed he had waited too long to begin housecleaning at both BCE and the Canadian railway, Sabia moved fast, traveling to France to entice Roland Lescure, then deputy CEO and CIO of Groupama Asset Management, to take on the CIO job at Caisse. Starting in October 2009, Lescure began tackling the job of portfolio simplification, and a new round of layoffs and hirings began.

“When I got here, the magic word was ‘diversification,’” the French-born former government economist and asset manager explains. “I called it de-worsification: When you own a bit of everything, you don’t own anything. It took a lot of reprogramming of people, a lot of change.”

Caisse’s hedge fund portfolio, invested in 130 different funds, was a perfect example of overdiversification; Lescure slashed it to 25 funds. When Sabia questioned the need to invest in any hedge funds, Lescure told him that having access to top asset managers’ market views would help him understand activity in the markets. “We learn about the profession of asset management,” says the CIO, who is also co-head of the investment risk committee and serves on Caisse’s executive committee. “They’re a window on the world.” These managers can also serve as a canary in the coal mine when it comes to spotting crowded trades: “If all hedge funds are doing the same thing, we probably shouldn’t be doing it,” Lescure says.

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