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Power Corporation of Canada
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Good morning, ladies and gentlemen. And welcome to the Power Corporation Q4 2022 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for a question. [Operator Instructions]
I would like to remind everyone that this call is being recorded on Friday, March 17, 2023. I would like to turn the conference over to Jeffrey Orr, President and Chief Executive Officer at Power Corporation. Please go ahead, sir.
Thank you very much, Operator. Welcome, ladies and gentlemen. Happy St. Patrick’s Day to all. And joining me here today is Greg Tretiak, Chief Financial Officer of Power Corporation and I will walk through some of the slides in our presentation and then we will open it up for questions.
So I will draw your attention to the cautionary notes regarding forward-looking statements and non-IFRS financial measures on pages two and three.
And then with that, I will skip all the way ahead to page six, just to highlight other information available from Power Corp and our operating businesses that are -- have recently come out from different earnings calls or presentations.
And then, with that, move right to page seven and start to talk about the quarter. Power Corp announced yesterday that it increased its dividend to $0.525 per share on a quarterly basis, a $0.03 increase or 6.1%. That’s really flowing through the Great-West Lifeco increase that was announced at their quarter earnings and then making certain adjustments on a pro forma basis for the additional Great-West Life shares that we own and then the lost dividends that we have from having sold CMAC to IGM and when all that comes out in the wash, we flowed it through and we have a 6.1% increase in the dividend.
It was really -- I -- we thought a very strong and very solid earnings quarter for Great-West Life and IGM. You would have followed their particular call, so I won’t go into it at this point, and then a lot of noise, like a really noisy quarter, in particular, a combination of, in some cases, some markdowns to market on some assets.
And in other cases, writing liabilities where we actually had positive developments, but we either have liabilities towards minority shareholders or we consolidate the accounting, and you are marking to market on the minority interest when there was an increase in value. So Greg is going to walk through some of that for you, but obviously, a lot of noise when you get outside of Great-West Life and IGM.
The quarter from a point -- a business point of view, I have to talk about what goes on in the U.S., because that’s where we have put a significant amount of capital over the last couple of years. So the integrations of MassMutual and Personal Capital were completed in the fourth quarter.
On MassMutual, the expense synergies were achieved and the targets for participants in assets and revenue were ahead of what we had planned at the time we did the transaction, so that’s good news.
Also, I will talk some more about in Empower Personal Wealth in a few minutes. And then the Prudential integration is on track, we just closed that deal to remind you at the end of the first quarter in 2022. So we are just three quarters into that.
I will speak about IGM’s strong results and GBL, I will move all the way down to the bottom. The last couple of points, we had pretty good fundraising in a difficult environment at our alternative investment platforms and we have been active on the share buyback and capital front.
So I will then move to page eight and this is a difficult environment. You had both -- as everyone knows, both the stock markets and the bond markets down in 2022. I know, in the third quarter, I have seen a lot of material coming out saying a 60 bond -- 60-40 equity bond portfolio, it was the record drop it own.
And I don’t -- I haven’t seen that, whether that’s been brought forward to the fourth quarter, but it is -- it was, certainly, in my experience, having both market down by this much is really -- it was a very difficult year and we, of course, have fee revenues that are driven by market levels across the business at both IGM, but also at Great-West Lifeco and through our businesses.
And the right side is just a proxy, this is Canadian Mutual Fund sales, so that was the first -- the worst fourth quarter on record. But you have got the same thing going on in the U.S. where you have significant outflows. So there’s -- investor confidence is not -- it was not a year of high investor confidence.
And of course, then we have got what’s happened over the last week or so in the U.S. Banking and now over with Credit Suisse. So we are in a very challenging environment as all of you are aware and we are navigating through that.
I am going to turn it to Greg then for the next few slides to walk through the financial results. Greg?
Good. Thank you, Jeff. As Jeff said, there’s a fair bit of noise in the quarter. We are anticipating with the adoption of IFRS 9 and 17, for future quarters, we are going to adopt that in Q1 and that should hopefully dampen some of that noise that we have become used to in the accounting.
But nevertheless, this quarter, I will turn to and net earnings $486 million versus the $626 million of last year and adjusted net earnings of $394 million versus $676 million and we will see some more color on that on the next page.
And adjusted net asset values were moving up shortly, or I should say, smartly over the last quarter from the low of Q3. So we are -- from the year end, we are up about 10% at $46.19 in our NAV per share, and of course, the dividend increase we have already mentioned.
So I’d go to page 10 and on page 10, you can see that we have focused on basically two aspects of our business, which is basically the operating companies and their earnings for the quarter. And you can see that net earnings of operating companies produced an $833 million contribution and here we have the adjusted earnings at $70 -- $741 million versus $702 million, which is obviously reflecting the good results at Great-West Life in the quarter and I know that was announced last quarter and they had a very good quarter back in February when they announced that.
And IGM, certainly reflected the AUM year-over-year and even though it was down slightly, I think that they have produced a very good result in the quarter, strong contributions from their net investment income and Northleaf and Great-West Life. So a good quarter all in all for them as well. And you can see that the contribution from GBL and the effect of the consolidation, which primarily is driven by GBL. So you have to look at the two together.
The other thing I’d point you to is, where some of the noise in the quarter was and you can see in Sagard and Power Sustainable, a negative $183 million. That’s driven largely by the $160 million from Power Sustainable, a charge of $63 million on the revaluation of the NCI, and as you may be aware, we manage that particular asset and fund, and therefore, we consolidate it.
So whenever fair values go up, which they did, which is a good thing in the quarter, they went up on that set of assets to $1.35 billion versus $805 million and that’s $230 million change in the quarter. And with that change in the quarter, we have to mark-to-market the non-controlling interest and take that liability onto our books. We don’t get to recognize the increase in the fair value, but we have to recognize that.
And the other item that I draw origin to is Power Sustainable is our China issuer portfolio, which was repositioned in the quarter. I think in -- speaking to our team there, they repositioned the portfolio in advance of the October Congress and in anticipation of the March meetings of the party and repositioned the portfolio and adjusted it. So, therefore, we see a lot of realized gains in the quarter.
Realized losses.
Yeah. Sorry. Yeah. Pardon me. Thank you. Looking forward…
Jeffrey Orr
Okay.
On looking forward -- next time. Yeah. Great. Standalone businesses is another one I’d draw your attention to and you can see that, that is driven by a mark on Lion. Lion, we marked it down by $109 million on our books.
And they had a good quarter. They just reported they delivered 174 vehicles, up from 71 last year and I think they were right on target with respect to their delivery. So I think they were pleased with their quarter.
And with that, I think, I will turn it right back to you, Jeff.
Okay. So we have -- thank you very much, Greg. We have got the -- Greg has already spoken to the net asset values on page 11. So I will just kind of skip over that page and move us on, make a few comments on page 12 on Great-West.
The results have already been well publicized and Great-West had their own meetings. I’d just highlight a few things. One is Great-West Life, in terms of our disclosure and our communication with the market, you are aware that Great-West Life gave medium-term financial objectives back in, I think, it was June of 2001 when they had their Investor Day, if I am remembering that correctly and they have reconfirmed their medium-term financial objectives.
And they have also, as you are aware, are tracking that and then every quarter, saying how are they doing against the objectives that they communicated both on earnings objective and the ROE objective. So that’s part of the effort to continue to improve our disclosure and our transparency.
And this quarter, I think it is noteworthy, there’s a lot of kind of confusion I think is a fair word to say, about what was happening at Empower and so the decision was made that with respect to Empower, they would actually give earnings guidance and they gave guidance that they expected in 2023 that earnings would be up 15% to 20% from the level of 2022. So that was another important step forward and that’s what I would highlight in terms of IR disclosure.
I will go then to page 13. Not really anything here on this page. I think I have already made my points as I made my introductory remarks. So why don’t we move it forward to page 14.
They did announce in just last month that they have now in effect combined the individual business of Personal Capital, which was a direct-to-consumer business, wealth management business and the individual business of Empower, which is a retail business, most of the money in that retail business are flows that come out of the defined contribution business as people retire or change employers and so they have combined those into one branded business called Empower Personal Wealth.
So the Personal Capital brand, well, is not part of that anymore and they are continuing to build out the Empower brand. That’s about a $50 billion wealth manager right now when you combine the assets that were in Empower’s retail business and the Personal Capital direct-to-consumer business. That’s under one brand.
It’s under a common leadership of Carol Waddell, who was announced a little earlier as President. She had been running the retail individual business of Empower. And you are going to start to see more branding of that business, which will obviously is important in the individual business, but also hopefully, will have some benefits on our defined contribution business.
If -- for those who watch the Broncos, there may be some of you out there that are watching on Broncos, we hope that more of you watch if you are a Power shareholder. We encourage you to watch. You saw that the Empower Field in Denver, but you are also -- there’s a start of rollout of ads on TV to talk about to bring the Empower Personal Wealth brand to the marketplace. So everybody’s excited about what’s going on there.
And importantly, again, on the disclosure front, Great-West Life is going to begin reporting the results from the defined contribution business of Empower and the Personal Wealth side separately starting in Q1 2023 and they are going to have a session in the spring to -- for investors and analysts to cover that and other issues, other factors.
Okay, going forward, just to comment on IGM, it was a pretty strong year in a very challenging market. And good leadership by IG Wealth, strong flows in a difficult market and everyone is -- they are obviously very focused on their expense management.
And Greg mentioned as well, not only good flows at IG Wealth, but Northleaf had a lot of new commitments during the year. So good momentum and we are very encouraged by what’s happening at IGM.
On page 16, you just get a breakdown of the momentum in terms on the left-hand side of attracting new client flows and that’s a testament to what has been done at IG Wealth over the last really six years, seven years, a lot of investment in technology and new products and different kinds of products and a different recruiting model in pricing.
And we have -- we have been saying for some time, we have a -- we believe we have a very competitive offering and a differentiated offering in the Canadian wealth market and that’s showing up in very strong client flows, including clients that are bringing accounts to IG Wealth that are greater than $500,000, which you see along the bottom of that left-hand chart, even 2022 a difficult year for investor confidence and yet still bringing really good flows into the platform.
Okay, let me turn then to page 17. IG Wealth, their business model is really comprehensive financial planning and it is not a product focused approach. It’s a planning focused approach and part of that is to be as comprehensive as they can be.
And that includes mortgage -- dealing with the mortgage needs of their clients, the insurance needs of their clients and they announced in the quarter that they are going to use nesto as the basic platform to bring our mortgage services to our clients.
And that was announced and basically it’s going to allow our advisers with really a leading-edge platform that fits right into the financial planning capabilities. It’s an online process, which is very, very convenient, is really miles ahead of where we were where the folks at IG Wealth are very excited about it.
This is another example of our fintech strategy playing out with our operating businesses. Now I think you are aware, our fintech strategy was much broader than just trying to get some capabilities into our operating businesses. It was much broader than that.
It included, at one end, trying to create and have a place with some emerging businesses to place our group in the digital space. Well, simple personal capital would have been two examples of that.
It included the Portage, VC funds to expose ourselves and all of our group companies to what was going on in disruption and emerging technologies. And then there’s been some opportunities where the groups have operated together and actually done something on a JV basis. So nesto is one of those a conquest, which is the financial planning tool is now being used by IG Wealth and Canada Life.
And Dialogue, which is the telephone health app that came out of the groups, as well as being offered across the Canada Life platform to its group clients and some other carriers in Canada as well. This is never an exclusive strategy to our group. So anyway, we are pleased about that, and at the same time, IGM made an equity investment in nesto. So that was a very good moment for the group.
Turning to page 18. We, of course, closed the ChinaAMC transaction in January, like, a little over a year after it was announced. It was a long process, longer than I think we had anticipated, but we are delighted that we have got approval and the transaction went forward. So it is now -- this is the last quarter that you will have direct reporting of CMAC in Power’s businesses and IGM will be obviously reporting on there now 27%, 28% interest in the company.
But I will just point out CMAC in a difficult year overall and a difficult year for the Chinese market, you can see on the lower left that, it was not a strong stock market year in Chinese equities. But the company has really performed well, continuing to grow their AUM and keeping their profitability at very strong levels, so good results for CMAC.
I am going to turn to page 19 then and just a couple of comments here. GBL continues on their strategy of putting more of their portfolio in private assets and they continue to do so, as well they have been active on the capital management front. In addition to their regular dividend, they have been active buying share buybacks and canceling those shares and have announced an intention to continue to do so.
And at the bottom of the page, it’s funny how a year ago, everybody was talking about ESG and it was kind of front and center and it’s not going away and it’s continuing, it’s going to continue to be a very strong focus, I think, of the world of shareholders, of all of our stakeholders and of all issuers, but hasn’t got a lot of attention. And it’s been kind of side-swiped by all that’s going on in financial markets and inflation and then what’s been going on in the last week or so.
But it’s nonetheless a force, and in that regard, our companies continue to be very active on it, and GBL was recognized, as you see at the top of the page. They like Great-West Life, IGM, the Power companies continue with significant efforts in that whole important area.
Okay, turn quickly to page 20 then. I mentioned good fundraising in a difficult fundraising environment and we have had more announcements in the first quarter, additional fundings we have announced and so you see some of the funding here.
We have got now $21 billion of funded and unfunded AUM and Power’s share of that continues to decline. And so the dark blue lines are Power. We do have Canada Life and Great-West Life participating in some of what we are calling third-party here.
Particularly when you get into debt products and some of the areas where they are -- in real estate where they have big interest. The real estate business, of course, as you see on this page, which was in Sagard was Great-West Life’s U.S. Real Estate Advisory business that was folded into Sagard. So but good buildup in our AUM.
And you see a little more of that as you turn to page 21, on the bottom right-hand corner, you can see the funded fee-bearing assets, because the $21 billion are the commitments, but the fee-bearing assets is at $15.5 billion and you can see Power’s portion of that year-over-year is actually down $600 million.
On the profitability side, on the lower right-hand side of that slide, a little bit of noise at Sagard at the top in the fourth quarter and noise can come from -- sometimes they will close a fund that has been out making investments and we would be putting the capital up it closes and there’s a catch-up on the fees and then sometimes there’s -- on the expense side, there can be expenses that can be of a one-time nature.
We think Sagard is running somewhere around breakeven at an FRE point of view. I am sorry, somewhere is not a very specific term, but we think they are running at about breakeven more or less as we look at their current run rate, even though it’s showing a loss year of $5 million in the quarter, we think there’s some noise in that number. And currency can have an impact here as well, as a lot of their assets are not in the Canadian dollars and some of their expenses are, for example.
And then down at the Power Sustainable level, you do have -- you see an increase in the management fees there. They are still further away in terms of their assets and their revenues and their fee-related earnings. And a lot of that is just where they started from and a lot of the business and the expenses are tied to the energy business, a lot of those assets are now in the $1.6 billion infra equity fund.
That was the fund that Greg was describing when we talked about the markup and the value of the assets where we had the loss on the non-controlling interest, I think, you call it PSIP or whatever, but that is in effect the equity infrastructure fund. And we had a big group of people working at Power who are developing energy assets for our balance sheet and so that’s a big group.
And some of the expenses are that legacy group, they are very talented people, but we are getting that business to the point where you have got fees covering it, it’s a longer effort than some of the other strategies we have.
So, anyway, that’s maybe more detail than you wanted, but Power Sustainable made progress on fundraising and on the revenue side and they are very focused on getting themselves to profitability.
Okay, just a quick comment on page 22. Greg mentioned Lion Electric and what’s happening there. We did put US$25 million into their raise -- their fund raise in the fourth quarter. Some of you may say, well, how’s that happening? I thought we are becoming a financial services company.
What are you doing putting capital into nonfinancial services? And that is true, but we have said all along that we are long-term investors. We make commitments to partners, to other shareholders, to management teams and we don’t dessert those commitments, even if our strategy changes. In the case of Lion, it’s got a really exciting business, long-term prospects.
2021 we were -- businesses like Lion and other VC type early-stage companies were able to raise a lot of capital. We went out and did a SPAC and a lot of money was raised. And 2022 was, as you know, the complete opposite, capital markets have dried up.
And so we did not dessert Lion and we participated in putting, not a meaningful amount of capital from a Power point of view, but meaningful for Lion to help support that business as they continue to build out.
But that doesn’t change our long-term goals that industrial companies are eventually not going to be part of the portfolio and we will look for the right opportunity to monetize those in a way that makes sense for Power Corp shareholders and also honors our commitments to our partners. So that’s my comments there.
And then I will turn to page 23. So $1.7 billion of capital returned in 2022. It’s our dividends plus the share buybacks of 11 million shares or 1.7% of the total participating shares. We did that while also building up our cash position and with the sale of CMAC to IGM, we are at about $1.6 billion of available cash.
We like to keep 2 times our fixed charges. That’s a guideline that we keep. We don’t follow it religiously, if there’s an opportunity. We sometimes go below it. We are sometimes running above it, but we kind of keep that as a guideline and so we have got some available cash here to be, in the absence of other opportunities, buying shares back. And we did that, of course, while we were -- we maintained our very conservative leverage and our very strong credit ratings.
All right, I will turn to page 24. Everybody’s favorite topic of discussion, at least around here is the discount to NAV. After five years of it hovering at historically high levels, we have been on a march, I think, starting really with the sale of Great-West U.S. Life business and then the three-way buyback and then the announcement of the reorganization in the end of 2019 and the pursuing the strategy, which we have been doing for the past three years.
It hasn’t been a straight line down. It’s had some volatility to it. And but it’s on its way down and the discount has gapped out in the last several months. So we view that as an opportunity. And we think our strategy, as we continue to execute, will drive the discount down.
I have been asked many times, where should it be? I don’t know where it should be, but I know that the only economic factor that I can see that would justify a discount is the expense load that we have at Power and that -- when I do the math, is somewhere around 2% to 3% of the NAV, not to be too precise about it and the balance is all available for us to continue to drive or buy shares back and arbitrage that discount. But I think the real strategy is to continue to simplify and continue to execute on our strategy, and as we do so, we think that, that -- we are hopeful that, that discount will narrow over time we are very focused on.
And I will just conclude, I won’t really -- on page 25 it’s there for you. You know the strategy. We are still on strategy. We continue to think about what we do next? What can we do better? What can we do differently? But we are basically still executing the playbook that I think most of you know well.
And with that, I will stop my comments. And Operator, if we could open it up for questions on the line, we would be pleased to take questions.
Thank you, sir. [Operator Instructions] And your first question will be from Graham Ryding at TD Securities. Please go ahead.
Hi. Good morning.
Good morning.
Maybe just on Power Sustainable Energy, what drove the large increase in value there, obviously, the impact on your income statement was the impairment charge on the non-controlling piece, but what actually drove the increase in the fair value for those investments?
You want to do that, Greg?
I can.
Please go ahead.
Yeah. Absolutely. So we have got a -- in Western Canada, we have a number of turbine wind generation units that have been in production and development and a significant project went from development into production and drove the revaluation of that particular asset. And we have several other plants that will be coming onstream in the coming year, and certainly, as that comes onstream, we would see a similar sort of thing in the future.
So we look forward to further write-downs as we increase the value of the portfolio. So I am just rehearsing for a meeting with the auditors. We are seeing a lot on that, I don’t. Graham, other questions?
Yeah. No. That’s helpful. Yeah. One more if I could, just the fundraising across your different verticals, perhaps, the alternative platform, obviously, private equity, venture capital, it seems like the environment right now is quite difficult, but then private credit and sustainable infrastructure possibly more positive. Can you just give us some color or context of what you are seeing from your outlook for fundraising?
I will start and then, Greg, you add anything you would like to. You are quite right, credit funds have been where the market has been and we have also been successful. The equity infrastructure fund we just talked about was $1 billion in the fourth quarter. Another $600 million was raised by investors. I think Power’s participation with that, was it $50 million, do I have that wrong?
Yeah.
$50 million of $600 million, which the first tranche, we were $400 million of $1 billion and we were $50 million of $600 million. Now Canada Life took a little bit of that as well. But the -- so that’s equity infrastructure in the fourth quarter. So good fundraising there, we have done private credit.
But we are making some progress on some of the equity sides as well. Power Sustainable Capital launched an agri -- sustainable agri PE fund. That’s about $160 million raised in that fund. They are looking for more capital and we are seeing some progress in Europe on some of the equity products that we have got there.
So it -- but your over -- your characterization overall is correct. Income safer type products are getting a lot more traction in this market than the higher risk ones. And certainly, in the VC space, lots of opportunities out there to invest some money, but that’s a little bit tougher going. But we are still optimistic, our track record will get some more money into those funds. Greg, did I miss anything?
No. I’d just say that in some of those funds or verticals, the agricultural one, in particular, is interesting that they were able to launch that fund without any seed capital from us and I think that’s a pretty special accomplishment…
Yeah.
… in terms of their ability to raise capital. It’s -- they are in the sweet spot as they say.
Yeah. Correct. Is that good, Greg, Graham, excuse me? Graham, did that answer your question?
We lost him.
Did we lose Graham?
Oh! Sorry. I was on mute there.
No.
Apologize. No. That was helpful. And I guess just one last one if I could. With the revaluation that you took on those non-controlling interest, will we continue to see that potentially under the new accounting standards that you are moving to?
As long as we consolidate them, Graham, we will have to do that. And I should have said earlier on, the three fair value marks, there was also the one in, say, BL [ph] where we took another fair value mark for $18 million in the quarter.
And on that one, in particular, it’s due to the puts that the management team has on the equity of Webhelp, and of course, we have to mark that liability as Webhelp is going up. And we bought that back in, I think, 2019 for about €800 million, and we, I mean, GBL and today the mark on that is something like €1.7 billion.
So we have been marking up the liability for probably a good 10 quarters now and not recognizing the gain. So thanks for asking that question, because it just gives you a bit more insight. So if you add the three of those together, like, we had about $180 million of mark -- fair value mark in the quarter that contributed to the noise in the quarter.
While you are on that, if you don’t mind, I was -- I meant to say in my remarks and I didn’t, on the Lion mark. I just want to make it clear here that we marked that down from where we were carrying it on the books, but that’s not to say that we have lost money on the investment. I just want to be clear on that.
I think we are somewhere just a little north of $100 million. We had C$54 million when the company did its stock. We put another US$18 million in, as I recall, at that time and then US$25 million in the fourth quarter. So you do the currency there, we are somewhere just a little north of $100 million and I think the market value of our position is about $220 million is what we have got in rate at this time.
So we have got a good gain on the position, but because when the SPAC occurred, we had a dilution gain on our equity position and we had some options to buy more equity that then got marked up onto the book value when the SPAC happens. So we are marking it down from where it was on our books, but the actual value of what we own is still significantly above the money that we have put in. So just to make that clear.
Good color. Thanks.
Okay. Graham more from you?
No. That’s good. Thank you.
Okay. Thank you very much.
Next question will be from Nik Priebe at CIBC Capital Markets. Please go ahead.
Okay. Thanks. Within your venture capital funds at Sagard or maybe even among portfolio companies more broadly across the asset management platform, can you tell us how you are navigating the recent dislocation in U.S. regional banking and whether you are taking any action to assess counterparty risk with respect to primary banking providers there?
Yeah. You are talking about within our VC and our fintech world and I think that’s where your question is focused. And of course, we like everybody else have been going across every portfolio we have in all of the companies and kind of finding out where our exposures might be and I think the answer to the question is not very much.
But I am going to turn it to Greg, who’s been -- who is Chair of the Risk Committee of the various groups, who’s been spending a fair bit of his time just making sure we are on top of this, as well as the rest of the team over the last week or so. Greg, did you want to add anything to that?
Yeah. So, it -- certainly nothing material in terms of the group, but obviously, to some of these startup companies, it’s disrupting and they are having to find different providers of operating lines and look to their LPs or GPs in some circumstances to provide them with the capital that they need to continue their business and our teams are going through that exercise right now.
But no significant dislocation, I would say, from the folks that are operating our platforms either in Canada or in Europe at Ciena, which is our alternative platform now renamed JBL Capital, so and Ciena Investment Management. So it’s been split in two. But anyhow, no significant dislocation that we have heard so far.
Okay. That’s very helpful. And then maybe stepping back, thinking about the asset management platform more broadly. Over the past few years, you have been raising a growing amount of third-party capital across that platform. Does there come a point in time when the carry eligible capital seasons sufficiently that you are able to crystallize significantly higher carry in order to accelerate the path towards profitability there? Is that a few years down the road or how do you think about that opportunity?
Crystallize carry. I think as -- I would put that as the strategies mature, one would hope and expect that if they are meeting their investment returns the carry will become larger and grow if that’s what your comment is, if they are meeting their IRR targets versus funds that are in the early stages.
The -- so I think that would be our expectation as we move forward. But the carry is also volatile, as you know, because as you get into the larger amounts of the carry, a lot of it’s on the equity and on the VC type funds and so you are susceptible to markets going up and the markets going down.
So you -- so that carry line will have volatility on it as will our seed capital that -- because you mark it up and you mark it down. So there’s -- when you are in that business, you have got the fee related income, which we -- the FRE, which we focus on because it’s kind of how are we doing on our fees and how is that covering our expenses and then you expect that those will create value over time, but there will be volatility is what I’d say.
But, yes, you are right, as they mature, you would expect the carry to continue to grow. And if it doesn’t grow, that means you are not making returns for your shareholders, you are probably not meeting your targets and you are probably not going to be doing more fundraising in that strategy. So does that answer your question?
Yeah. Yeah. No. That’s good. That’s it from me. I will pass the line. Thank you.
Okay. Thanks, Nik.
The next question will be from Geoff Kwan at RBC Capital Markets. Please go ahead.
Hi. Good morning. You talked about with Sagard that you think you are running roughly the breakeven right now in FRE, but Power Sustainable isn’t quite there yet. To getting to breakeven on Power Sustainable, is that like a one-year or two-year or other kind of time horizon to get to that breakeven level on FRE?
Probably it might even be three years out. I think it’s more than one year or two years. But it’s a bit of a combination. I was trying to hint at that, which maybe I wasn’t clear enough, Jeff. I think Power Sustainable is two pieces and the first piece is that just the straight business of going out and fundraising, putting teams in place, launching strategies, getting the revenue side up and managing your costs.
And that’s -- business is not as developed as Sagard. If you think about Sagard, Sagard has done an amazing job of launching new products and new strategies and credit and royalties for Canada -- an example, Canadian PE. But they have also had businesses that had been around for a while and I’d point to Sagard Europe, which was a private equity business that Power started over 20 years ago.
The fintech strategy, which the Sagard team and Portag3 [ph] and others started to not give them credit for starting, but that was done in 2015. So it was already at a point where it was more mature and then they rolled in the Great-West Life’s U.S. Real Estate, which already had a bunch of assets under management. So there was a bunch of strategies there and then they have augmented that with a fantastic team in launching new products. So it’s further along in its revenue base and its scale and scope.
In the case of Power Sustainable Capital, its two main strategies where the China Fund that was all of Power’s capital and so they went out two year, three years ago to raise money into China and that’s been a bit of a challenge to be -- for obvious reasons, it’s not exactly where capital has been flowing in the last few years.
And then they had their energy infrastructure, which is now the $1.6 billion fund. They have done a really good job of bringing outside capital into it. But they are in the process of launching new products to broaden out their scale and scope. So we talked about the agri fund and there’s more that they have in the works and other teams that we expect and announcements that we are hoping to be making over the upcoming 12 months to broaden out their base of products. That’s one side of it.
The second side is we have this kind of legacy of expenses that were development people that work within Power and our subsidiaries outsourcing wind projects and sun projects and we have them in Canada and we have them in the United States and they were never set up at Power to be income-generating. They were set up to invest our capital.
And then you hope to get a double-digit return on the development part and then we were going to -- the previous strategy and then we would end up owning a nice, stable cash flow earning company. And so that was never set up as a fee-generating income and we still have a lot of those expenses within Power Sustainable Capital.
The plan is to change the mix from how much we have in development and how much we have in income producing properties, and ultimately, those people end up working for the funds and they end up moving off of the P&L of Power.
That may be more than you wanted to hear in terms of detail. But what I am saying is Power Sustainable Capital, very different position and a different challenge to profitability, and whether we launched an alternative asset management business or not, we would still have those projects on the books. We still have those people to pay for.
So it’s kind of there, whether we are pursuing alternative asset management or not. But it’s been in the interest of transparency and disclosure, we have got it all pulled together into the Power Sustainable Capital P&L and that’s one of the reasons contributing.
So what did I just say, in a nutshell, I just said, the alternative asset management business is at a started at a far more less mature point than Sagard did and one of the main strategies is in China, so a difficult fund rating.
And secondly, there’s a development team, a lot of people here that we have got assets to develop and we have got a work, we have got -- we are where we are. We are going to continue to develop those assets and that contributes to the greater loss. So that’s a long answer to a short question, but that’s what’s going on. Greg, yeah, please add to that.
And so, Geoff, the only thing I’d add to that is that, they just recently announced two new funds, the U.S. and U.K. Infra Debt Funds. And so with that announcement, comes as well the hiring of teams and standing up of those funds, right?
And so you are talking about the J curve and so until you get now funded it up and running, we are going to have expenses. And that’s going to happen until they actually hear -- hit a mature point and they are generating enough excess cash flow to cover their expenses as they are adding platforms. So that’s certainly one thing that would contribute.
And not that they are going to be launching 20 verticals in the next level out, but as you can appreciate, there’s a lot of green space and excuse the pun in the area they work in. Power Sustainable is an ESG focused and centric, so they see a lot of opportunity. So that’s one of the reasons why we think the runway there may be just a little longer than one might expect.
Okay. And just my second question was on the OpEx side, you kind of have been where you wanted to get the OpEx when you collapse the structure with Power Corp and Power Fin. Just wondering going forward, how you think about what OpEx growth looks like from here?
Yeah. It’s a great question and one we need to turn our attention to a little bit. I think we were trying to as much as -- we were reorganizing, we thought there was an opportunity to drop costs and we are also trying to send a loud message across, both internally and to the street that we are very, very focused on creating shareholder value and we need to have discipline in everything that we do. So that’s kind of a statement of where we got to.
Now we are not going to be crazy about it. If we have an opportunity to either add some real talent that can add value to the topline and the value creation and that would mean that we would have some increase in that, that -- and we shouldn’t be blind to it. I think we were very, very focused on meeting the target and right now our view is we are going to hold the line on expenses and grow it with inflation, for example.
But I also -- we are not going to be stupid. This is a dynamic business and we sometimes we are pretty -- we are not a huge group at Power, as you probably know, and if we got an opportunity to hire some talent in that we thought could add value to the business and it was going to mean that our costs were going to go up by several million dollars to do it, I think, we would be dumb not to do it.
So I -- what am I trying to say there, we don’t have any current plans to increase the cost base. We are going to manage it but we are not going to be blindly following that and missing opportunities. Greg? I am now looking at the CFO who actually manages the cost. Greg is wincing as I am saying that. You can’t see him. Greg, anything to add to that?
No. I think you captured it well and our expectation would be that we will continue our run rate. We are basically where it is plus or minus a couple of million dollars for inflationary expenditures in the foreseeable the quarter.
The CFO has spoken.
All right. Great. Thank you.
Thanks.
Thank you, Geoff.
The next question will be from Jaeme Gloyn at National Bank Financial. Please go ahead.
Yeah. Thanks. Good morning. First question, just on the China shares, could you give us a little bit more color as to perhaps what sectors those shares were or the losses were realized upon and then what exposures are potentially left in that portfolio today, maybe from like an industry perspective or however you want to break that down? Thanks.
Before -- thank you, Jaeme, before I pass that question to Greg. I just again want to point out that we follow the NAV and the returns and how that is -- we look at the NAV all the time and say, what’s the portfolio worth. The losses, as you know, just for everybody in the line, you would know this Jaeme with everybody in line the losses come through when they actually realize the positions.
So while we look at the NAV, all of a sudden, the portfolio manager says, they bought some positions and they want to reposition or go more to cash or what have you. So they will liquidate the positions and change the portfolio and those realized losses move through our P&L.
But we -- whether they realized -- when they were -- when the loss -- when it’s part of the NAV, it’s already part of the NAV, it doesn’t change NAV. We tend to focus more on the NAV, but the financial statements reflect the actual sales of securities with that. Greg, did you want to?
Yeah. So two things I’d say, Jaeme, on that particular question. One that, you will notice that the NAV on that has actually increased slightly over the last quarter, I think, we are sitting at 666, like, $666 million in terms of NAV.
And when the portfolio managers were repositioning the portfolio, like, in the Q3, I think, it was at the bottom, if my memory serves. But they basically stay away from the SOE based businesses and that’s the state-owned enterprises and they have -- the portfolio basically is composed of non-SOE positions. And they didn’t change that going into the party Congresses or coming out, but they certainly repositioned the portfolio.
And the specifics of that, I can’t give you the portfolio names, but certainly, they would have held a lot of retail facing positions in companies and so -- and they would have had a certain amount of technology in the fund as well. So they were basically realizing losses.
And in some cases, they just moved off the position to lighten the exposure and repurchase them later after the meeting when they felt that the risk was off on some of those positions. So that’s the color I would offer for you this morning.
Yeah. Thank you. Very helpful. The second question, just as we are starting to see some other commercial real estate portfolios recent marks. I am wondering if you have any commentary on commercial real estate and how that could potentially affect Power. We got the comments, obviously, Great-West, but thinking more maybe Sagard or elsewhere? Thank you.
Commercial real estate affecting Power. I don’t have an answer to that question. I mean, I have -- I can think of it in the context of the Great-West Life and they have already made your comments. We do have the Sagard real estate fund.
I don’t think there’s a lot of our seed capital in that particular fund. So I am trying to think on a real estate basis. Question is, would Power be impacted by a drop in value in commercial real estate. I am looking at right...
Yeah. Not directly, because we only through an LP investment in our platforms that has commercial real estate and we do not have direct exposure….
Okay.
…and I am just…
Yeah. Actually you are going through the same logic here. The reason we haven’t, we -- you can see how much we have been about it, Jaeme. I don’t think it’s an issue. We have not…
Yeah.
But we are trying to be -- think about here. It would be in the real…
Yeah.
It would be in EverWest and EverWest was a Great-West Life Investment and we brought it over and don’t have any seed in it. So I don’t think so.
Okay.
Yeah.
I don’t think so.
I am pretty confident to say that.
Yeah.
I don’t think we have that exposure.
Great. Very helpful. Thank you very much.
Okay. Great.
Thank you.
Are there other questions there, Operator? Yeah.
Ladies and gentlemen, there are no further questions. So this concludes your conference call for today. Thank you for participating and you may now disconnect your lines.
Thank you very much. Good-bye now.
Thank you.