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PSP Investments deployed $4.4 bln last year, as PE strategy bears fruit

  • PSP seeing benefits of new PE and infra strategy
  • Fiscal 2018 PE deployments C$4.4 bln
  • Fiscal 2018 assets C$19.4 bln, up 22%

Public Sector Pension Investment Board, Canada’s fourth largest pension system, is seeing the benefits of a three-year strategy that changed the way it invests in private equity and infrastructure, in part by doing more direct deals.

PSP Investments last week issued its report for fiscal 2018, ended in March, which shows PE deployments of C$4.4 billion (US$3.4 billion) last year. Of the total, more than half went to co-sponsorships and co-investments.

Dealmaking was mostly in the U.S. and Europe, engaging such companies as ceramic-products supplier CeramTec, medical-lab-services operator Cerba, and early-childhood educator Learning Care.

Active in PE and infra

The activity marks a third year of unprecedented PE outlays, totaling C$9.9 billion (US$7.6 billion) since 2015.

The portfolio finished the year with C$19.4 billion in assets, up 22 percent from fiscal 2017. Direct deals account for 51 percent of assets, up from 40 percent three years earlier.

PSP was just as active in the infrastructure space in fiscal 2018, deploying C$3.3 billion, two-thirds of it on a direct basis. Portfolio assets increased to C$15 billion, up 35 percent from a year ago.

Combined PE and infrastructure assets, standing at C$34.4 billion, are double what they were in 2015, when both asset classes were underallocated.

As Buyouts reported last month, it was then PSP decided to overhaul its private-markets operation by ramping up both internal resources and external relationships.

Guthrie Stewart, senior vice president and global head of private investments, who spearheaded the initiative, told Buyouts PSP has met its objective.

“PSP’s revamped strategy has been all about building scale and generating returns,” Stewart said. “We’ve achieved that.”

PE investments realized a one-year return of 12.9 percent in fiscal 2018, the report shows. While this is shy of the portfolio’s 17.6 percent benchmark, it improves on fiscal 2017’s 3.4 percent loss, which PSP attributed to legacy assets.

Stewart said enhanced performance owes to investing over the past three years, which generated a return “above 20 percent.” Direct deals have been a key driver, accounting for a return in the “mid-20s,” he added.

The infrastructure portfolio realized a one-year return of 19.3 percent, beating its 12.1 percent benchmark.

PSP, which manages the retirement savings of federal public employees, including defense and police forces, earned an overall one-year return of 9.8 percent in fiscal 2018. That helped lift total net assets to C$153 billion from a previous C$135.6 billion.

PSP’s private-markets operation is now at a “cruising speed of investing $4 billion to $5 billion per year,” Stewart said. That’s a “good position to be in,” he noted, as it allows PSP to be “highly selective in our priorities.”

It perhaps also shows good timing, considering increased market frothiness and high leverage levels. In this environment, PSP plans to hold dry powder so it can “pounce” on compelling opportunities as they emerge, especially in the event of a downturn, Stewart said.

Staying the course

Looking ahead, he said the strategy will stay on its current path, with in-house investment pros working hand-in-glove with external general partner teams. He expects the PE portfolio’s weighting of direct deals and funds to continue at a rough 50:50 split.

PSP commits capital to more than 30 PE firms, including Apax Partners, Apollo Global Management, Blackstone and TPG, as well as a dozen infrastructure firms.

PSP is also exploring new horizons. A priority focus is Asia, where the pension system aims to create a presence, potentially in Hong Kong.

Internal teams are based in PSP’s Montréal headquarters and London office that opened last year. A third location in Asia will provide access to emerging-market opportunities, much like the U.K. office expanded investing in Europe, he said.

Stewart, who joined PSP in September 2015, oversees some 70 investment pros led by Simon Marc, head of private equity, and Patrick Samson, head of infrastructure.

He said the group has reached a “solid foundation” over the past three years and will continue to see “measured growth.”

PSP is the youngest of Canada’s top four pension systems and likely the fastest growing. Its capital pool is projected to exceed C$200 billion by 2025 and C$250 billion by 2028.