So it's my pleasure to introduce our next speaker, Mr. Jeff Orr, President and CEO of Power Corporation of Canada.
Phil, how are you?
We'll continue on with the Power Hour here. So I think we're coming up on roughly five years, I think, since Power announced and executed reorganization and financial services-focused strategy. So we can start out maybe with you sharing your thoughts and progress since the announcement.
Yeah. Thanks, Phil, and thanks, everyone, for being here. It's a pleasure to be at this conference every year, and thanks for your interest in hearing our story, whether it's through Paul, or whether it's through myself, or James O'Sullivan is gonna be up later in the day. Thanks, Phil. You know, it's been—it is almost five years. It goes back to December 2019, when we announced the reorganization, and I think we've made really good progress. I feel good about what we've done. I'll talk about that briefly, and I think we're at a different phase right now, and I see the opportunities going forward in the next five years as great as they were in the last five years. In fact, I feel better about them, more confident about them.
But if I turn back over the last five years, you know, we have done a number of things. We simplified what we did to financial services, we simplified our structures in many ways. I think we've really strengthened the base, businesses of Great-West Life and IGM, in that they're better positioned to grow their earnings on a consistent basis than they were five years ago. We have built out, in a difficult environment, a number of strategies at Power Corp and raised a lot of capital in our alternative asset management businesses. And I think we've communicated more to the market and done better disclosure and had a much more active outreach program with investors at each of Power, Great-West Life, and IGM. So I feel great about all of that, and it's produced good shareholder returns over the last five years.
I think we're entering a phase, or we're in a phase right now, where, as I look forward, we are not. I don't see the frenetic pace of deal-making that we had certainly over the first four years, where we really did a lot to reposition businesses. I don't see that same repositioning being required, which, and so I think we've entered a phase where we're focused more on execution. The strategies are clear. Each of Paul Mahon, James O'Sullivan and his team, what we have at Power Corp, GBL, they've got very clear strategies. We're into execution. I think that's exciting because I think what we're trying to do is deliver on earnings growth and make sure that we've got great earnings growth. I think that's what investors pay for.
I don't think they pay for- we do a lot of stuff that we think is gonna pay off in five and six and seven years, and I don't think we get paid for that in our stock price. I think we get paid for delivering earnings and dividends, and I think we're focused on that from an execution point of view. I feel confident as we move forward here, that we're gonna be able to continue to deliver the same kind of returns as we have over the last five years. Lots of things get in the way, and there's lots of third-party and market factors you can't control, but I feel very confident in the position.
Excellent! Well, listen, I think there's several demographic and industry shifts, likely to accelerate over the next decade, in a few years, but I guess, given your transformation, I mean, which do you see as probably the most important in terms of amplifying Power's competitive positioning, and introducing growth opportunities?
You know, I think there's a number. I think where we are positioned, we're taking advantage of the technology drive that is providing advice on the wealth and in the group space to the mass market opportunity. If you go back 10, 20, 30 years, advisors were dealing with CAD 50,000-dollar clients and CAD 200,000-dollar clients, and the way of the future is that's not what's happening right now. They've migrated to a higher net worth, and what is replacing that is a digitally based offering, with either advice available on an as-needed basis or a salaried advisor that accompanies the client at a much lower price point, but still offering good advice and good outcomes for clients. That's actually been growing, and it's growing...
The evidence and will continue to grow, in my view, and that's good for society, and that's also good for the providers. Where are we doing that? Examples of that are across Great-West Life group wealth businesses in particular. Obviously, Empower is the big example of that, but we also have the opportunity to do that in Great-West Life's Canadian group businesses, in Ireland, in our group business. I just caught the tail end of Paul. He was talking about Germany and the DC opportunity that could emerge there. Wealthsimple is an example of that, and that's coming at it from a different point of view, of creating a new business that's going after the next generation, but coming at it with a digital footprint.
So, so the first thing is the whole emergence of dealing with a massive part of the population to help them save using digital and technology, but you need scale, you need technology, you need brand to do it, okay? So we're well positioned to do that. I think, high net worth is another opportunity where our group has been underrepresentative, underrepresented relative to some other parts of the segments, but we still have great growth opportunities there. And there is gonna be a massive wealth transfer, as you know. It's on the one hand, the baby boom is retiring and moving into their next phase, but there's an opportunity there on wealth transfer and money in motion, and I think, we are investing and will pick up.
IG Wealth, as you know, has retooled their business to go after more high net worth, for example. The flows aren't evident right now 'cause the Canadian market in the last couple of years, with high interest rates, high inflation, you got a lot of people that are squeezed, so savings rates are down in Canada. But I think that, as an example, of where we'll be well positioned, but also in other parts of IGM. Through Rockefeller and others, we've got opportunities to grow in high net worth. I think the final thing I would say is that there's still, we haven't seen it play out yet, but we are going to see, I think, more demand for dealing with income security as this generation ages.
One of the things about the drop in and kind of the death of the defined benefit plan is that individuals have been left to deal with their longevity risk on their own. It used to be socialized through. It still is through the Canada Pension Plan and through government plans, and those that are fortunate enough to be in a DB plan. But for the rest of, again, this is a mass market, mass affluent market comment, not a high net worth comment. Individuals shouldn't be managing the risk that they live to a hundred on their own, and everybody's gotta save as if they live to a hundred in case they do. That's something that should be dealt with on a collective basis. It's a natural insurance product. That opportunity has been around for a bit.
I still think that's a demographic force that I think over the next ten years will start to be a bigger factor, and I think Great-West is well positioned to play. So those would be three right off the top in terms of kind of market forces and demographics, where I think we have opportunities.
Excellent. And again, what do you think are likely to create the biggest headwinds, and how is Power positioned to mitigate that?
Yeah, so I guess the headwinds are around financial services. It's the flip side on technology. You have a continual fee compression that you just build into your models. You just deal with everywhere you are, fees are going down every year, so you've gotta deal with that through scale, efficiency, greater volume, consolidation of market positions. I think the baby boomer phenomenon is you are having a lot of money that is coming out of financial savings as people live off their savings, so that creates an outflow. And so you gotta be in position yourself to be picking up where the market is flowing into. And when I talk about the opportunity to manage the longevity risk, i.e., income security, that's you gotta be in services that actually benefit from that.
So there are some headwinds. Rising regulatory costs would be another one. So there's a bunch of headwinds. You just deal with it, and you build it into your plans, and I think it drives scale. Ultimately, it is part of what drives consolidation in financial services, is the way you get around that is through lower costs.
Okay. And if I pull it back more to, I'll call it near to midterm, I mean, what do you see as the biggest growth opportunities for Power over the next three years?
If I look over three years, I think undoubtedly the U.S. opportunity at Great-West Lifeco through Power is still the biggest opportunity we have. I think the United States has been the biggest driver we've had in the last few years, and it will continue to be our biggest opportunity, and I think it would be our priority call on capital as well. The DC market, although it's a mature market in the United States, is one where there are too many providers, and we have a different approach to that market than most of the providers, and it will be a growth market for us for the next 10 years, notwithstanding that the market is in a mature phase.
We have revenue drivers that we are just developing, and we're not dependent on the same revenue drivers as the incumbents, i.e., we didn't build a business to build a great, big proprietary product book that we're now trying to protect because of fiduciary duties and passive coming in. We come at it with a low proprietary penetration and lots of products and services that we have yet to offer, and we have digital relationships with eighteen million Americans. That's gonna be the biggest opportunity we have and will be the first call on the capital of the group. I think you talked about over the next three years.
I think at some point here, this is more a cyclical comment than it is, kind of a long-term, secular comment, but I think if inflation has been beaten, and rates do come back, and you get, savings rates back to some normal level. That's a lot of ifs. I think you'll start to see, some growth in other parts of our business. So I think IGM has been investing heavily in retooling its businesses in the last two years. It's been in outflows, and everyone kinda goes, "Ho-hum, what's happening there?" But I think at some point, you can't, you can't just- You know, we know that we've built up a better offering, we know we have greater client outcomes, we know we're winning with high net worth clients, and from a small market share.
At some point, I think that shows up. If the, if the you know, over the next three-year period, I would expect that we get better macro factors that would give some growth into that business. And then, I think the other opportunity, maybe it's not for growth, but it's, but it's more for value recognition. I think we still have some tools at the Power level to communicate our story and at the Great-West Life story. As much as we've made progress on the communication front, I think we can do more to show how some of the sources of earnings and value growth that we've had in the last five years are sustainable.
I still think there's some doubt in the minds of market participants, both around Great-West and around Power, on our ability to drive extra value, and I can get into that maybe more. But those would be kind of my three drivers right now on US return and to more flows in the market and IGM, and then some opportunities to create some value at Power Corp.
Excellent. I guess I'm gonna circle back on some of the comments you made-
Yeah
... in the opening, your opening remarks, just in terms of strategic positioning, in terms of how much work you think you've got left, and more specifically, are there capabilities you'd still look to add here?
So, if you go... Not of the magnitude of five years ago. If you go five years ago and just talk about Great-West Life, we had an insurance business, we had a DC business, 401(k) business, we had Putnam, and now we have one great big Empower business, right? So that's huge repositioning. $5 billion-$6 billion of businesses sold, $10 billion of businesses purchased. I think of that magnitude, no, I don't see that coming. But I'll start with my comment on the U.S. At Empower, we would definitely have our eyes open and would be the natural buyer, and I think there'd be three things that Empower would look at: more DC players that might exit, and so it would add to the base the way we did with MassMutual and Prudential.
Could we add to the scope of the services that we're offering to our, the employees and the sponsors? So are there other types of services that the corporates that we're serving are currently getting from a Fidelity or getting from other competitors that we don't have in our, in our toolbox right now? There's some holes in the offering, so we might expand the scope. And then finally, the really big opportunity over time there is the wealth management opportunity. As you know, we've got $1.6 trillion in the U.S. on the Empower platform. The bulk of that is in DC. About 6% of that comes out of plan every year as money in motion, as people retire or change jobs. Tapping into the wealth management flow is the biggest opportunity we have.
What can we do to augment the capabilities of our wealth offering would be a third level, and kind of acquisitions in those three areas would be priority number one, I think, for the group and for Great-West Life. Having said that, I just caught again the tail end of Paul's businesses. The business sets that we have, we have competitive offerings in all of the markets that we're at. We don't have number one market shares. We're typically number two, three, four in the markets that we're in.
Our playbook has been for decades, and will continue to be, if an acquisition opportunity in market arises where we can enhance our market position and drive higher earnings through synergies, we're gonna have our eyes open to it, whether it's at, whether it's in IGM, whether it's in Europe, whether it's in Canada, we. I fully expect there will be M&A opportunities. While I say I don't see an answer to your question, I don't see the magnitude of need of repositioning that we had five years ago, we're not out of the M&A business. We've been in the M&A business for a long time, and I would expect and certainly hope over the next few years, we get some other opportunities.
Excellent. It's great color. How should investors think about potential optionality related to GBL?
GBL is pursuing a very clear strategy of having had primarily public companies. It was, quote, "an influence." This business model was an influence investor, own eight, 10, or eight to 10 major companies, build up a 10 to 15% position, get on the board, get some change, make some money, and then kind of rotate it over time. That was the old strategy. They're migrating from that to getting out of the public companies over time and think they can add greater value in the private markets, and that migration has been going on for about three years. They're doing that by liquidating some of their larger positions. They just sold out of most of their adidas position. They were the largest shareholder in adidas.
When they liquidate those assets, some of that money is going to invest in their private business, and some is being returned to shareholders. That has been done through buybacks up till now, until just last quarter, they announced an 80% increase in their dividend that they're gonna pay out next year. In Europe, they announced a dividend, and it gets paid out the following year. So more cash flow is the first thing, okay? So that's what their strategy is. I would like to think we could get more cash from GBL through either higher dividends, maybe ultimately, we participate in share buybacks, but looking to get more cash out of it. I think GBL, like a lot of holding companies, has been underappreciated. It's trading at a big discount.
I would expect that if they keep executing, they'll get some better valuation. We'll see some NAV build up, and that, that would be a good start to creating some greater value from GBL. We have been partners with the Frère family going back to 1980 or 1981, so this is a forty-four-year partnership, and if you see our disclosure material, you know we have a signed partnership agreement to stay in partnership with the Frère family on GBL until 2029. So if your question is, do you see anything dramatic happening on the GBL front, is that if that was underlying your question, we are at a shareholders' agreement until 2029. I wouldn't expect anything dramatic to happen, but I would like to see more cash coming out of the investment.
Excellent. I guess in the wake of all the changes across the operating companies, are there any still, like, lingering operating synergies, that you could execute on that might accelerate earnings growth across the companies as well?
Yeah, I would say that the bulk of them are on the distribution side, and that would go, for example, on alternative asset management across the board. We never force any of the companies to do anything, but we have an active relationship and dialogue going on across all of our operating businesses. So whether it's Sagard, Power Sustainable Capital, Northleaf, for example, our three alts platforms, they're all talking to everybody about where they can get distribution, and the distribution that we have needs their products. So that's an example. So IGM acquired last year 20.5% of Rockefeller, which is an ultra high net worth, very high growth platform being built in the States by Greg Fleming, and they've got a very good alts platform.
So, you know, Northleaf and Sagard and Power Sustainable Capital have all been down there saying: "You know, this is what we have." And so in that kind of a dialogue exists, and it's real, and it creates distribution. The same thing will happen on the insurance side. IG Wealth is a big insurance distributor and will be a bigger insurance distributor going forward, and they don't exclusively deal with Canada Life, but they're a big distributor for Canada Life. So product distribution is the first one. I think the second one is, it's a soft one that you can't put a multiple on, but the IP and the intelligence sharing about where the markets are going and the use of each other's capabilities is making the platforms more competitive.
The best example I can give of that is IGM. You know, IG Wealth has used Nesto to completely revamp its profitable mortgage operation. They were the first to introduce Conquest, the planning tool, which is now going out onto other distributors. These are fintech offerings that came out of the Sagard and the Portage fintech universe, and nobody forced anybody to do anything, but it's all part of pulling people together and seeing the opportunities. And so it's made the management teams of our incumbent businesses more aware to opportunities and allowed them to take advantage of those opportunities to create their offerings in a more competitive way.
And that's real, and it's meaningful, but you know I can't say, "Well, this is what the earnings are that have come out of that." It's not a multiple, but it's about building better businesses, and I think our the competitiveness of our offerings and the knowledge of our management teams about where the future is is being enhanced by that in a meaningful way. So what it no longer is, it used to be you could combine back office services and you know Canada Life used to service IG in a big way, and we were trying to get synergies. And with everything going to the cloud and everything going away from mainframes and like those quite frankly are less significant at this point.
It's more on the revenue side than anything else.
Okay. Let's shift gears a little bit, and we'll talk about capital. How much excess capital would you estimate Power Corp has? And, and maybe talk about what the current capital priorities are.
So you're asking it from a Power Corp point of view, and I always tend to think because Great-West Life and IGM are 80% plus of our value and a 100% of our sustainable earnings or repeatable earnings. I think of capital allocation from a group point of view. I think there I've already answered the question in terms of the, you know, the US and the priority areas of where our capital would be. But at the Power Corp level itself, was your question. We have about CAD 1.5 billion of cash right now, but CAD 300 million of that is earmarked for dividends that are declared and unpaid. We have about CAD 400 million-CAD 450 million of what I would call excess cash, relative to...
We like to keep about 750, 800, which is two times our fixed cost in dividend and interest payments, two, two years. That's not our line in the sand, but we tend to keep it around there. And that capital priority, when the stock's trading at a 25% discount to its NAV, I know what my priority is: buying shares back. Because every time we buy shares back, we're not only increasing our NAV, but we're also increasing the amount of earnings that we get and the amount of dividends we get from Great-West and IGM and GBL that flow through to the Power Corp shareholders. And it's tangible. You know, we were out of the buyback business through COVID. We were just being cautious, and we've got into the buyback business.
We've started to execute a lot more in the last two years, and I think I said at a recent analyst or earnings call, that the buybacks that we had done in the past two years have meant that our dividends at Power are CAD 72 million higher than they would otherwise be had we not done the buybacks, because we simply have the same dividend flow coming in. We have a lesser number of shares. We bought back net, I think it was 35 or 40 million shares, and that was an extra CAD 72 million when you figure out what we would have earned on the cash of dividends that were able to flow through.
Buying shares back is increasing our NAV, and it is increasing our earnings per share, and it's increasing our dividends per share, and that will be the capital priority. If Great-West Life or IGM came along and said, "We've got a great big transaction here, we wanna do an equity offering," Power has historically underwritten those by putting up CAD 500 million or CAD 600 million, and we've done that four or five, at least four times in the last twenty years. If they did that, that would, of course, be the we would prioritize that. But other than that, it's buybacks.
Okay. Are there other levers or maybe kind of sources that you could draw to potentially accelerate the share buyback, given that steep net discount?
Yeah, whether it's to accelerate or not, I think we can sustain the pace, which has been, you know, CAD 400 million or so a year for the last few years, 400 or 500, I don't have the number exactly in my head. And the sources of that, we can do a better job of explaining to the market, 'cause I think people have focused on the fact that, you know, we've got non-core assets that we've sold and have looked to. So we still own Lion, and we still own Peak, which is Bauer, Peak Performance, sold Rawlings Bats. These are kind of vestiges of the pre-we're-a-financial-services pure play, and it's quite amazing, five years later, we still own them, but COVID and a few other things happened along the way.
So people thought the only source of capital we had was to sell the non-core businesses. We still have that, but we have, we also have CAD 2.2 billion of seed capital underpinning the alternative asset strategies, and those are creating opportunities to take money out of the strategies. We think we're earning about 10% on balance. That's the target returns. 15% on the equities. Some of them are fixed income. So there's, you know, a sustainable CAD 200+ million of capital that comes from that. I can recall at the end of the first quarter this year, or in February, there was kind of skepticism: Where are you gonna get your next dollar to buy buybacks?
And we couldn't say anything 'cause we weren't in a position to say it, but we announced two weeks later that we'd taken CAD 450 million out of our China strategy 'cause we had closed the strategy, and next thing you know, we got CAD 450 million of capital. You know, so we've got lots of tools in the toolbox-
Right
... to continue to sustain buybacks. I don't know that I would go to increase buybacks at this point, but I think we can sustain them on an ongoing basis here.
... Okay. Well, let's shift a little bit, and let's focus in a little more on the alternatives platform. And again, you've expanded that third-party AUM using a fairly capital-light approach. It's been a really tough fundraising environment for alternatives in general, but your platforms continue to grow. So what do you think has been the key success factors there?
Yeah, I think we've gone from, like, CAD 4 billion or so when we started to CAD 26 billion up at Power, and Sagard has been a big, big part of that. The answer has been, there are three things. We've had good performance in the funds, and while the higher risk strategies of venture capital and equity haven't exactly had a lot of uptake in the last few years, fixed income strategies, you know, royalty strategies, the equity infrastructure, where it's more of an income-oriented type, have continued to do good fundraising. Secondly, we have turned to partnerships to bring in capital.
So bringing in partners into Sagard, for example, Canada Life, Bank of Montreal, Lunate, which was the Abu Dhabi fund, was ADQ, changed their name to Lunate, who come along, buy into the GP but also make significant capital commitments to the funds, has been a second tool. And third, you know, we realize that we're not, there's other companies out there who have been building and built up five- and six- and eight-billion-dollar businesses, and all of a sudden they're having trouble fundraising, and they need a partnership, so we've turned to M&A. And so you've seen Sagard, in particular, buy Performance Equity, basically a fund-of-funds equity platform, plus HalseyPoint, a CLO platform, to add, and they, they've added...
One of them was a CAD 9 billion dollar platform, another was a CAD 4 billion dollar CLO platform. Not all the CLO platform's not in the numbers at this point. They've basically gone out and done acquisitions of other asset managers to add to the product suite. So three tools: fundraising, where you can fund it based on good performance, bring in partnerships at the GP level, then use M&A. And at some point here, the private alternatives market will get back into an inflow basis, but it's going through a hard, hard point right now, and we're using all those tools to keep growing the business.
Excellent. And again, we are running down a little bit of time here. I'm gonna kinda get to a point here as well. I mean, what do you see as the best avenue to get more value for the alternative platform reflected in that stock price?
I think we have put, and I have put too much, and our teams put too much emphasis on the profitability of the GPs, and have excluded where most of the value is created. So I think as much as I say we've done a good job at communication, and I think we have done a better job at communication, I think we haven't done a great job here. So I think the answer is, we're creating... We have CAD 2.2 billion of seed capital, and we're creating a lot of returns on that seed capital.
You may not wanna buy Power Corp because, "Oh, my God, I have to own that seed capital, that's what I want!" It creates a lot of additional value for us, and we've actually built up a lot of carried interest. That dwarfs the profitability. The profitability out of the platforms at the GP level is negligible, so of course, it dwarfs it. That's actually where the value's been created so far, and I don't think we've told that story, and that's our fault. That gets me into, you know, what is the value creation strategy going forward? I think, and I think that's the key point, and that's where I started the thing, moving forward.
Great-West Life, and IGM, and GBL have really clearly articulated strategies, and Great-West Life and IGM are based on earnings, and dividends, and growth, and they've got clear strategies and targets that I think that they can execute on. Great-West Life has proven that. IGM needs a little bit of market help here to be able to get some momentum in their core businesses. When you move it up to the Power Corp level, you end up with that on a more diversified basis. And then we have some operating leverage, 'cause we have some fixed expenses and some financial leverage, mostly preferred shares. So we can take that growth and amplify it through the operating leverage that we have.
We have this bucket of 20% of our assets that don't earn any money, that we're not getting paid for, that actually can create cash, and we can turn that cash into share buybacks and leverage the operating leverage even more. So if we can create a 12%-16% TSR at Great-West Life and IGM, we should be able to add a few points on top of that at Power Corp, and you get it, but it's a more diversified play and a more liquid play. So that's our and the alts platforms are part of that. That's. You may not wanna buy Power Corp, "'Cause I gotta own their alts platform," but they are actually part of creating that extra return that creates an extra few points at TSR.
Right.
That's the way I position it. Then I always say, if you wanna buy Great-West Life, or you wanna buy IGM, it's fantastic. They're great companies. Go buy them. Power Corp is another way to play them on a more diversified basis, with a little bit more operating leverage built into the formula.
Okay.
That's kind of the story.
Excellent. Well, listen, our time's kind of running down, but maybe kind of one final closing thought and question. We've kept you, hopefully, keeping you fairly busy through the day, talking to investors. But after talking with them, you know, over the last six months, twelve months, what do you find is the biggest misconception, related to Power Corp or even the Power Group of companies?
I think there's a big misconception. Here's the issues I think we would need to clarify. I think at Empower, because it's a mature industry, which is our thesis, we went into it and have built this out, saying, "We're gonna, we're gonna be able to grow this thing for the next 10 years in a mature industry," and the industry's in outflows. We have to do a better job of explaining we are actually growing our market share organically and through acquisitions, and clarify some of the noise that happens from some of the larger, one large loss in a year, or one large gain at the very high end, which you don't make a lot of margin on, can swing those numbers.
So there's some confusion around the maturity with some people about the Empower, or is this a good industry or not? Does this plan make sense? That's on us to explain it. I think secondly, there's a few areas where we need to do a. We can do a better job of showing the sustainability of what we're doing. At Great-West Life, I know the team is very much on, you know, across the businesses here, we can actually generate capital, and we haven't explained that in a way that we could. So there's better disclosure, and the team is all over it at Power Corp. But just to explain, there's kind of doubts about: Can you sustain your buybacks? Well, all of that is on us, okay? Like, we can still improve our communication.
So I don't think it's like there's a big misconception that we have out there. I think we've got a few areas where we have to communicate better so that the market has the same confidence that we do when we look forward.
Excellent. Listen, it's a great conversation, and on behalf of Scotiabank Global Banking and Markets, Jeff, I wanna thank you personally for taking the time out of your day to participate, along with the entire Power Group of Companies organization, for your continued support. Again, thank you, Jeff.
Thank you. This is a great conference, and thanks to everyone for participating. We look forward to meeting many of you over the course of the day. Thanks, Phil.
Thank you.
Thank you.