All right, welcome back. We're joined by our next speaker, Jeff Orr, CEO of Power Corporation of Canada. Jeff, welcome back to the conference. Thanks for joining us.
Thanks, James. It's a pleasure to be here. Thanks very much.
Let's kick off with maybe the topic of the day and something that didn't really come up on the call, but probably because it isn't that much from a material impact standpoint, but maybe talk about tariffs and any impacts from tariffs or a prolonged trade war impacting any of the businesses within the Power family.
Yeah, I think from our perspective, we actually have regional businesses everywhere we operate. We're not directly trade impacted, and the impacts on our business would be of a general economic nature. If there's a slowdown in the economy or all the way into a recession, you get lack of investor confidence, so that can affect flows in the business. If it got really bad, we've got a balance sheet of Great-West Lifeco, you could have some credit losses if you got into a serious recession. Even there, Great-West is pretty defensive relative to other financials in terms of the quality of the balance sheet. It's not anything that directly impacts it from us.
From a currency point of view, Great-West, which is about 67%-68% of Power's asset value and probably closer to 80% of our sustainable earnings and repeatable earnings, I think about 30% of the business is Canadian and Canadian dollar. It's U.S. dollar, it's euro, it's sterling, and even IGM, which is the other main part of the earnings driver, although it's all Great-West, or I should say IG Wealth and Mackenzie are Canadian-based where the earnings come from. Even there, they have a lot of U.S. assets in the portfolio. You look at Power, we're not particularly Canadian dollar focused. We're probably more diversified, so relatively well positioned for that. We worry about it more as what's it doing to the world and free trade and Canada and all of that, as opposed to particularly hitting our business.
Yeah. That kind of leads into the next question, which is there's a lot more uncertainty in the market today. How does that uncertainty that's present right now affect how you're thinking about the strategic outlook for Power Corporation of Canada?
Not too much would be the bottom line. I think the businesses have all of their strategies and they're continuing to build and allocate their capital without any constraints being put on as a result of the current situation. We have historically done a lot of M&A, but it's a little bit episodic. It's when the opportunity is there. We're not doing large-scale M&A every year. We continue to look. If we were sitting here today about to pull the trigger on a big deal, would we be worried about what could happen in the world? Probably. It would factor into our discussions, but we always run downside cases anyway. Anytime we do a big transaction, we go, what happens if the world falls apart? We run all kinds of scenarios.
We might put a little more weight on that if we were about to pull the trigger on a big deal, and we would under normal circumstances, but it's not going to stop us from looking at things. The type of deals we do are strategic. They're usually in market in a business that we have where there's synergies. I don't want to downplay what's going on. Like a lot of people, I spend a lot of time talking about it. It seems you can't have a dinner or a lunch conversation today without getting to this one topic. I don't mean to be nonchalant from a citizen of Canada or a citizen of the world point of view, but honestly, from our business point of view, it's not really changing anything that we're doing.
Yeah, right, of course. Maybe thinking more or driving into the strategy, you were on a simplification strategy for the past 5-6 years now, pre-COVID even, more focused on financial services as opposed to diversification. Investments have been made organically, inorganically to strengthen the companies at the operating level, Great-West, IGM. As we think about the next steps in the Power Corporation strategy, do you see that happening more at the opco level, the Great-West, IGM, or is there something that can be done at the holdco level?
Maybe give some context before I go directly to that question. The last 5 years, we have executed on the strategy, and I've often said to people, we spend at Power Corporation roughly 75% of our time working with Great-West Lifeco and IGM as major shareholders, not running the businesses, but helping them in terms of strategy and capital allocation and looking at leadership issues and major risk issues. They have themselves really retooled their business, and their businesses are much stronger than they were 5 years ago. That's obvious at Great-West Lifeco. I think it's also true at IGM, not quite as obvious. The flows, they're more market dependent, and the flows have been difficult in Canada because of inflation, high interest rates, et cetera, that we've experienced over the last 3 years.
I think both businesses are much stronger positioned, and they have in themselves created strong shareholder returns that have driven our shareholder returns. At the Power Corporation level, we have basically taken the, I divide the portfolio at Power into what are earnings driven. That's Great-West Lifeco and IGM, and they produce just about all of our sustainable repeatable earnings. The rest of the portfolio, being GBL and what we have at Power, is basically valued on a net asset value basis. I personally look at our overall picture and say, we do not get paid for any of that. If it's not producing earnings or dividends, the market goes, that's nice, but come and talk to me when it translates into earnings.
What we have been doing is we've been cleaning that up, focusing in on financial services, building value through the sustainable alternative asset management, through the alternative asset management portfolios, but actually freeing up a lot of capital and buying shares back. We sold CAD 3.6 billion of assets out of Power in the last 5 years. Some of that was refocused into the capital in the sustainable platform. We bought some Great-West Lifeco stock from IGM at one point as well, but CAD 1.8 billion has been to buy shares back. In doing that, we're doing a couple of things. We're actually shrinking at the margin the NAV portfolio relative to the earnings portfolio where we get value. Then we're turning the assets that look like we're not getting any value for them into earnings by buying shares back.
That actually bumps the NAV, it bumps the earnings per share, and it bumps the dividends we can pay. We are kind of taking that portfolio and turning it into something that is driving earnings. That is what we have been doing, and we have created returns of about 15% over the last 5, 6 years, a little more if you go back 6 years. These things are very sensitive to start date and end date, but over a whole bunch of different periods, we are going to be around that, and that is what has happened at our subs as well. That was not an answer to your question. That was an answer to what has just happened in the last 5 years.
In the next 5 years, I think we can do that again, but actually a lot of the heavy lifting has been done as we're in, actually the businesses are in a stronger position simply by the 2 Great-West Lifeco and IGM creating, they've each got targets of 9% EPS growth. Great-West Lifeco has done more than that in the last 4 and 5 years. IGM has not, but I believe they can do that. If you do that with a 5% yield on that part of the portfolio, we create another 10% on the rest of the portfolio and buy shares back, you're going to get a return 13%, 14%, 15% without any revaluation. By the way, the last 5 years, no revaluation. IGM and Great-West Lifeco have been trading about 10 times forward earnings. They were 5 years ago, they are now.
Discount was 25% at the Power level. It was 5 years ago, it is now. For all the chatter about simplifying it and all the investor relations calls and all the work and all the simplification, we're still trading at a 25% discount. We've created those returns, and we can continue to do that moving forward, just executing on the strategy if the companies create the 9% return, the earnings growth of 9%, which it's not a walk in the park, but I believe they can do it. Your question then, long preamble, your question was, can we do something more? Would we allocate more capital into the NAV type portfolios or something we can do to enhance that? I think we're disciplined on how much we're going to put into the portfolio that doesn't create earnings.
We're a long-term shareholder at Power Corporation of Canada, but most of our shareholders are public. I personally believe that they pay for earnings. We love putting money into building. The seed capital that we have at Power will continue to invest in that at about the same level. We do not see allocating more capital to it. We are going to continue to do the Wealthsimples and the Rockefellers of the world, but we have to, because we believe in 5 and 10 years from now, that could be Canada Life, that could be IG Wealth Management, but we are going to keep that bucket that does not produce earnings in a small enough bucket that we can deliver the shareholder returns that I talked about in the first part of the question, because most of our shareholders are public and we are going to deliver.
That's a long answer to say we're going to not, I don't think, allocate more capital into the non-earnings base, but we're probably going to keep it somewhere around what it is. If some opportunity comes up tomorrow, and you just made an investment at the margin, you'll put a little more capital, but over time I don't see it increasing. I don't know if I got to your question or if I did not.
I think that kind of helps us out. What you were mentioning about the discount to NAV and where the opcos have been valued, it's stayed relatively flat, but the NAV has increased quite significantly.
Yeah, so that's what I kind of go, like people go, wow, you've had a great return, like, whoa, this thing's starting to get toppy. They do not actually say that, but it's sort of behind the questions that I go, hold on, this has not been about valuation. We've had nothing on valuation, either on the discount or on the PE. The stocks are still trading. Where do you get this kind of growth and you're trading whether it's 10 or 10.5 or 11 times earnings, that's not bad. It's not like we're off running away on valuation. We just are going to keep doing what we're doing is basically what the message is.
One of the big drivers of performance has been Great-West and that compounding. Last year, I think they did like 17%-18% ROE. Maybe talk about some of the success drivers in Great-West and the strategies that are driving that. Maybe not to take away from what is going to happen next week, but talk through some of the Great-West story.
Great-West Lifeco has had a great 5 years. The business has been significantly repositioned. The U.S. was 6% of earnings 5 years ago, it's 31% last year, and I think that's going to continue to grow and it'll continue to be the priority as to where we allocate capital. I'll come back to the Empower story because it's impossible not to say a word on Empower. I think the other thing that's happened to Great-West Lifeco is the rest of the business from Canada to Europe to the reinsurance business, they have, depending on the line of business, 5%-8% earnings growth potential going forward, and that's what they are growing at. I think management at Great-West Lifeco has come a long way and are doing a better job of showing where that earnings growth is coming from, showing the sustainability of that.
I think starting to talk about the capital generation that comes off of that business and the cash generation. I think you'll see more of that at the investor day on April the 2nd. I think from a board point of view, and I'm the Chair of Great-West Lifeco, I have a lot of confidence that the other parts of Great-West Lifeco can provide a base of solid single digits earning growth and create a lot of capital generation, and they can do so on a repeatable basis. What adds gravy or what adds the spice and the sauce and gets the growth up to the 8%-10% that Lifeco has given as guidance is Empower. Empower is still, I think, the most exciting thing we have going across the group.
We launched the Empower strategy and we decided in 2006 after we bought Canada Life that we couldn't buy much in Canada anymore, and we decided to go out and say we were number 10 in the defined contribution space. We had 4 million participants versus 18-19 million today and being number 2 in the marketplace. Back then we said the baby boomers are going to retire. In 2015, 2016, the market's going to go into outflows. There's 40 suppliers. They all got into it to supply, sell mutual funds and if they were insurance companies, annuities. They're crummy at record keeping and they give shitty service. This market's going to consolidate and we're going to consolidate it.
The real opportunity is on the back end is people, the baby boomers are going to retire and we're going to be able to create a wealth business off the back end of that. The whole thing is going to sing. We did the whole strategy 18 years ago and we said now we're going to buy an asset manager and plug the asset manager into it. That was Putnam. That part did not work out so well, but we sold Putnam, but that was all part of the vision that we had 18 years ago. What is happening in the marketplace? Exactly that. We have created through organic growth, through heavy investment in the technology and in the platform and in the offering, and through acquisitions, a very large DC player, but it is actually an advice business we are building.
We're using record keeping and a very low cost base. Fidelity's got a cost base as low as ours, maybe lower, but they're the other one out in the market that's effective. We're growing share in the DC business and we can create 8%-9% earnings growth in the defined contribution business without further acquisitions. We have $1.7 trillion on the platform U.S., 6% of that comes out of market every year. People retire, change jobs. We've got an $80 billion wealth management business off the back end of it. We're getting about 13%-14% of that business every year into our wealth business. We were $20 billion 5 years ago. We did the acquisition of $20 billion for Personal Capital, but huge organic growth at 5 times the margin that we make in the DC business.
People look at it and say, you got a record keeping business, it's mature, the business is in outflows. We go, yeah, it's in outflows. That's been our theory for the last 15 years that it's in outflows. We're using that environment and our competitive advantage to build a very big advice business in plan. When the members are in plan, we're creating relationships and building advice and then out of plan into the Empower Wealth Management business. It'll create double digit earnings growth for the next 5 years as I can see without a further acquisition. I think at some other point there's going to be one or 2 players who are going to yell uncle and say, get out. We're using record keeping as a tool. We don't even love record keeping. We're building an advice business is what we're building.
It sounds like I'm excited about that. We've been excited about that for a long time. That is creating Great-West Lifeco from growing from 6%-7% earnings growth to get it up to the 8%-10% when you put all that math together.
Good. I'm sure we'll hear more about Empower next week as well. Let's shift from Empower, where the strategy seems to be playing out very nicely, go to IGM, where maybe it's a bit more mixed. IG Wealth doing very, very well. Mackenzie improving, but there's still some outflows. I shouldn't say negative outflows, but outflows.
Yeah, there's outflows for sure. Yeah.
Maybe talk through some of what's going on at IGM, some of the drivers of those flows and sort of the bifurcation almost.
For sure. The environment there, they both operate in the same environment. IG is a wealth management company, so it's got a much broader footprint and it actually is dealing directly with clients and providing them with products. They both are serving Canadian investors who are in the affluent, mass affluent up to high net worth and not into the ultra high net worth space. That market, when the Ukraine war happened and all of a sudden inflation jumped and interest rates went up, the whole Canadian market went from being 2%-2.5% inflows every year to being negative as people were either hit with high interest rate costs, high mortgage payments, or if they did not have cash, I can get a CD at 5%. I mean, that looks pretty good.
I've said to people, I haven't owned a CD in my entire life and I now own one of your CDs. They look at me and what's happening to the flows at IG Wealth? I go, I guess I'm part of that trend. The whole market went into outflows and started to come back at the end of 2024. If you ask me about 2025, you might. There's a guy got elected south of the border and I just don't know what that means, but the confidence had been coming back as inflation was coming down or rates were coming down. We were seeing flows come back. That's the context. Within that context, IG Wealth is, I like to say, not your mother's investors group. This is not the company that people would know 10 years ago.
It's gone from hiring 900 advisors a year to 100-150. We're getting experienced advisors; they never came on board. Pricing is like 50 basis points lower than it was if you go back a few years. Most of the money is not flowing into mutual funds; it's flowing into different SMAs and different types of products. There are some funds on that. The clients are basically giving the discretion to manage the money over to the firm. We've got a great technology stack. Look at the advisor surveys. This is not the company that people know. It's primed to take off. I believe it will take off when flows come back. The proof will be in the pudding. I could be wrong. I believe the business has been rebuilt. It wasn't great net flows until two and a half years ago; it was getting 3% flows.
I'm very keen on IG Wealth. Mackenzie also had a great journey where they had kind of been in the wilderness 10 years ago. They built their way back into a much stronger position. You guys are in the asset management business. They got a couple of big funds that have got some performance issues right now. That part of the shelf is in outflows and they've got some other good products that are in inflows. I think they've got a good distribution footprint. I think they've got a good brand. They've got a good product lineup. They've got a couple of performance issues that they'll need to work their way through. That's dragging their flows down. If you've been in the business, as I'm sure many of you have for a long time, that happens in the business.
I believe that is more of a short-term phenomenon with their performance than it is kind of where they're positioned in the marketplace. Those are the 2 big earnings drivers. Then we've got the rest of their portfolio, which is interesting as well.
Yeah, it's been very interesting. We'll leave that for IGM.
We could talk a long time about it if you'd like to.
Let's focus on the alternative strategies at Power for a second. Sagard and Power Sustainable. Growth has been good on the assets under management side. A couple of acquisitions as well. Can you talk about how you're seeing that business unfold? How you expect it to contribute to Power as it continues to scale?
We've got Sagard has been a rocket ship. Paul Desmarais III done a fantastic job. I said 5 years ago when we said we're going to be a, we went on the simplification strategy. We're no longer conglomerate financial services. Made the statement that we're going to build these into profitable businesses and they're going to create sustainable earnings. That part of the story has been completely wrong. We got that wrong and I got that wrong, which is different from saying it hasn't been a success. Sagard took a number of different strategies that we had across the group. We had a fintech strategy. We had Sagard private equity in Europe. A bunch of pieces that existed. Paul Desmarais III took that and then built a number of other strategies and bought strategies.
We had the GP, the manager Sagard on our books at $0 basically 5 years ago. We put $20 million into it. We have it on our books at CAD 400 million right now, our 50% share. He's done a great job at creating value. We have $200 million U.S. in annual fees on that. That's not including some of the recent acquisitions he's done. It's fantastic, but it's breaking even. I think Paul wants to build the business into a great big business. He's going, really? You want me to make $5 million of profit so that you can say we reported profit? When I want to go out and buy a business, I want to build a $100 billion manager, not a $35 billion manager.
I do not see that creating a lot of FRE, if you know the terminology in the alt managers. I do not see that. If we did a little bit, it is not going to make a difference at Power. We made money on the GP. Like at Power Sustainable, we have about CAD 2 billion of capital that is in seed capital under both strategies. We are making about, we think we are making about a 10% return on that. We are harvesting that. We are doing secondaries when they will come to us and say, we need to launch a fund. We need you to put $100 million in. 3 years later it is up and we might do a secondary and take some money off the table. We have taken a lot of money out of those strategies.
We have made money by creating value at the GP level. We have made money by harvesting the LP capital. We are using that money to basically fund buybacks. That will continue as far as we can see going forward. It was probably overstated when we communicated the strategy that we had these standalone businesses that we are no longer, like we just sold Peak, which is Power, for a 3X, by the way. That was a nice turn and CAD 435 million. That is funds that we can use to buy back as well. We sort of told the story that it was all the standalone businesses. We did not focus our communication or even our own thinking, I would say, enough on the fact that the seed capital is actually providing a lot of capital that is funding our buybacks. We have other sources of money there.
That's where it's at. We think we're creating value and we're trying to pay the bill, if I can put it that way, create the short-term TSR by not putting any more capital, recycling the capital and doing buybacks, which boosts our earnings, boosts our dividends and boosts our NAV as well.
Yeah. Yeah. I mean, on the buybacks, it's obviously been very active. There's a pretty healthy cash position today as well. With all of these transactions, some of the takeaways over the last couple of years is that that simplification strategy has really come through where the business is really driven by Great-West and IGM earnings and not so much the volatility that could be expected from some of these other businesses. Maybe talk through a little bit more about the buyback and then how is the business set up today from that, let's say from a risk or volatility standpoint?
Yeah. The buybacks is simple. We've been keeping the NAV portion at Power. Again, in my lingo, there's Great-West Lifeco and IGM and everything else is NAV. We've been keeping the NAV portion about equal and we've been growing through the success of Great-West Lifeco and IGM, that portion of it. Every time we take a dollar out of seed capital or out of a business that's not earning any money, even though we might have created value with it, and we buy shares back, what are we doing? We're selling a dollar of NAV. We're buying Power back at $0.75 on the dollar because it's trading. We're buying a pool of assets at a 25% discount. That pool of assets is 80% earnings driven because IGM and Great-West Lifeco represent 83% of the assets. We're selling a dollar of NAV.
We're buying 80 cents of earnings and 20 cents of NAV at a 75% price, at 25% discount. As you do that over 5 years, you're actually shifting your mix from an earnings. The earnings part is growing gradually a couple of points every year and the NAV part is shrinking, which is good for valuation if you accept my view, having talked to hundreds of investors. We love all that stuff you're doing on NAV. Knock yourself out. Come talk to me when it's creating earnings and dividends and I might pay for it in the meantime. Have fun. We don't want to stop doing the NAV stuff. Either at Power or at IGM, like Rockefeller could be a great business one day. Wealthsimple's already a great business. China Asset Management is a bit of an anomaly. We bought that because of relations.
China's not the popular place to be. That's a great company. We do these things that are 5 years out and 10 years out that we think will be the franchise. We're going to continue to think long-term like that, but keep it in a box and grow the earnings part and create underlying shareholder returns that are competitive as part of the playbook. That is the absolute bottom line. That's where I will end. I look forward and I say I can see the mid-range of our returns. If the companies grow their earnings at 9%, continue to pay a 5% dividend yield, and we continue to create about 10% plus with the balance of that and do buybacks, you just do the math, you're going to create a TSR in the 13-15% range. It doesn't depend on revaluation.
We're trading at IGM and Great-West, we're trading at 10-11 times forward earnings depending on what earnings you believe. Just keep the discount at 25%. I think the discount should be at 10%. Just keep it at 25% and do not have a revaluation on the subs. Your math is going to get you to 13-15, somewhere around there. Is that going to happen? I do not know. Companies have to deliver. I am assuming the markets continue to grow in a normal way, that we do not have massive shocks. That is the way we think about it. I talk to the board like that. We do not have to do magic. We just have to execute to make that happen.
We'll see it play out. That's all the time. Jeff, thanks very much for joining us again.
Thank you.
Good luck the rest of the day.
Yeah. Very happy to be here. Thank you. Enjoy your day. Thank you.