Michael Sabia, chief executive of Quebec's Caisse de Depot, announces the pension fund’s results for the year at a news conference on Feb. 25, 2015 in Montreal. On Thursday, the Caisse made a $1.5-billion (U.S.) investment for a stake in Bombardier Transport (BT) – a business that makes high-speed trains, light-rail vehicles and subway cars – in part because the rail industry is growing globally.Ryan Remiorz/The Canadian Press
The Caisse de dépôt et placement du Québec is tunnelling deeper into the rail market with its latest investment in Bombardier's transport division, a move that taps into themes that have driven the pension fund manager's increased investments in infrastructure.
The Caisse made its $1.5-billion (U.S.) investment for a stake in Bombardier Transport (BT) – a business that makes high-speed trains, light-rail vehicles and subway cars – in part because the rail industry is growing globally. The investment also fits with the pension fund manager's long-term strategy to build its portfolio in infrastructure and expand its geographical footprint.
"In Latin America, in Southeast Asia and India, the pace of urbanization, and the millions of people that are migrating to cities every day as a result of the economic progress, and the emergence of middle classes in those countries – it's one of the things that makes investing in infrastructure in those countries interesting," Michael Sabia, chief executive officer of the Caisse, said in an interview. "But it also makes [Bombardier] an interesting company because the demand for its products [is] going to ride a long-term, structural trend."
Countries such as India have sought to replace crumbling rail infrastructure, while developed markets such as the U.K. are also building new tracks and adding to old networks.
At the same time, institutional investors are clamouring for ways to invest in infrastructure – from airports to roads, shipping ports and rail networks. The Caisse aims to increase its exposure to infrastructure from more than $10-billion (Canadian) today to as much as $25-billion in four years, although it would not include the Bombardier deal in this category.
Mr. Sabia says investments in both infrastructure and transportation will be bolstered by an increased concern over pollution and environmental issues in cities – especially in emerging markets. The trend toward public transit favours the kind of technology that Bombardier uses, he said.
The Caisse also wants to broaden its presence around the world, Mr. Sabia said. BT operates in more than 60 countries with 39,700 employees. Its main base is in Europe, aligning it geographically with key competitors in the rail business, such as Siemens of Germany and Alstom of France. Other rail companies from Asian countries have added to the competitive market in recent years.
Months ago, speculation was rampant that two Chinese train makers, CSR Corp. and China CNR Corp., were likely to buy the BT business, after their own merger was completed. The combined rail giant CRRC Corp. is an aggressive competitor for contracts in its home market, where road, rail and port networks are rapidly expanding along with cities, and has been hunting for international opportunities. A deal with Bombardier would have provided a channel for the Chinese company to bring its trains to the West.
Now Bombardier and the Caisse said they would be open to the Berlin-based BT pursuing its own acquisitions.
"We understand that there is consolidation in the rail industry, and the way we've designed the structure with Michael and the team has basically preserved the ability for us to do what's right in terms of industry consolidation," Alain Bellemare, chief executive officer of Bombardier, said on the call. Mr. Sabia added that the Caisse would also look favourably on acquisitions and would ideally like to invest with Bombardier beyond the three-year term outlined in their latest agreement.
Transit has been top of mind for the Caisse in recent months. In March, it paid £440-million ($895-million Canadian) for a 30-per-cent stake in high-speed train service Eurostar International Ltd., which runs train services between London, Paris and Brussels.
And, over the summer, the Caisse rolled out a subsidiary called CDPQ Infra after it reached a deal with the province of Quebec to provide infrastructure support, analyzing potential development projects for returns and viability. So far, two public transit projects worth about $5-billion are being considered, including a route along Montreal's Champlain Bridge and a system linking downtown Montreal to the city's Trudeau International Airport and the West Island. If the projects go through, it would put the Caisse in a position to finance, build, own and operate light rapid transit systems and commuter trains.
Mr. Sabia said the Caisse's 2012 investment in French transportation company Keolis, which operates transit networks such as buses and metro rail, offered a helpful perspective that was needed to make the BT investment. It was also a key reason the Caisse was interested in the deal with Bombardier.
"From sitting on the other side of the table where we're the client, to a company like BT, which is the supplier, that has given us a feel for how these projects work, what these technologies are like and whose are better than others – all that has contributed to our institutional knowledge base," he said.
Bombardier is the world's only manufacturer of both trains and planes, but the turbulent aerospace division has no appeal for the Caisse – even if that's where the fund's cash will be directed.
The Caisse did not consider at any point participating in the deal that the government of Quebec has made with Bombardier concerning the C Series plane, Mr. Sabia said. "That was not part of our game plan."