Mid-year results from Canada's second-biggest pension fund, La Caisse, were dragged down by its private-equity portfolio as valuations tumbled for certain holdings viewed as vulnerable to the adoption of artificial intelligence.

La Caisse, also known as Caisse de dépôt et placement du Québec, said Thursday its average return on depositors' funds for the six-month period ended June 30 was 5.1%. A 14.6% return on equities during that six-month period was offset by a 4.3% decline in the private-equity portfolio.

Canadian pension funds typically measure themselves against an in-house index given the diversity of their public and private holdings. Caisse said its six-month performance was below its in-house index of 7.5%.

The Montreal-based pension fund said the private-equity sector faced challenging market conditions, from a decline in transaction volume to rising interest rates. "The portfolio also experienced a decline in valuation multiples for certain companies operating in industries seen as more vulnerable to the increasing adoption of AI, such as technology, insurance and financial services," Caisse said in its earnings statement.

The Montreal-based fund manages 552 billion Canadian dollars (US$395 billion) in net assets, trailing only the Canada Pension Plan Investment Board in terms of pension fund heft in Canada.

"We are navigating in an environment where more than half of the return on a traditional equity and bonds portfolio comes from AI since the beginning of 2023," said Charles Emond, Caisse's chief executive. "The public and private markets are facing very different realities."

At a press conference, Emond said the private equity portfolio has been a major driver of returns in recent years, earning 7.9% over a half-decade. "Of course, it's a difficult cycle, but we need to understand that AI has affected certain sectors," the CEO said, adding some of the hardest-hit companies in the private-equity portfolio are profitable. "So we can see that the market sometimes reacts swiftly by penalizing entire industries."

Caisse manages pension money for much of Quebec's workforce, and has a mandate to help support the French-speaking province's economy. This week, Caisse teamed up with Blackstone to acquire a 25% stake in Air Canada's Aeroplan loyalty program, at a cost of C$2.5 billion. Air Canada is a Montreal-based airline.

Emond said the Aeroplan deal injects money into Air Canada at a time when the carrier is taking a financial hit from elevated energy prices. He said the Blackstone-Caisse deal "is a win for the public. It allows Air Canada to invest in their fleet, and it gives us stable income."