PSP Investments ramps up direct deals to half of PE portfolio assets

  • PSPIB: strategic shift to more direct deals
  • Co-sponsors, co-invests now slightly more than half of assets
  • PE investments set record in fiscal 2017

Public Sector Pension Investment Board, one of Canada’s largest and fastest growing pension systems, is doing more direct deals as part of a strategy to transform its approach to private equity and infrastructure investing.

Over two-plus years, PSP Investments has deployed billions of dollars to a series of global transactions, shining a light on the characteristically low-profile institution.

One result has been growth in PE co-sponsorships and co-investments to “slightly above” half of portfolio assets today from 40 percent in 2015, Guthrie Stewart, PSP senior vice president and global head of private investments, told Buyouts.

PE investing set a record in PSP’s fiscal 2017, when outlays totaled C$4.8 billion (US$3.7 billion), more than half of them earmarked for direct deals.

Stewart says activity in fiscal 2018, about which PSP will report in June, will show the “momentum has continued.”

PSP has been just as aggressive on the infrastructure side, investing C$2.6 billion in fiscal 2017, nearly 70 percent of it on a direct basis.

Combined deployments in this period lifted PE and infrastructure assets to more than C$27 billion, up 57 percent from two years earlier.

Stewart says these statistics mark a “dramatic shift” since 2015, when he came on board to overhaul the private-markets operation.

At the time, both asset classes were underallocated. PSP’s goal was to turn things around by “broadening the strategy, taking a more disciplined approach” and further diversifying, Stewart said.

Initiatives included scaling the talent and capabilities of internal personnel, split between PSP’s Montréal headquarters and the London office opened last year.

Focus was also given to building more external relationships that could add value and “drive direct investments,” Stewart said.

External partners are mostly select PE firms. PSP commits capital to more than 30 general partner teams, a “foundational number” that will likely continue to expand, Stewart said. About a dozen infrastructure firms also secure commitments.

Examples include American Securities, which in March supported PSP’s investment in early-childhood educator Learning Care, and Ardian, which in December sold stakes to PSP and Caisse de dépôt et placement du Québec in industrial engineering group Fives, reportedly for US$1.8 billion.

Two others are BC Partners, which in October teamed up with PSP and Ontario Teachers’ Pension Plan in the US$3.1 billion buy of ceramic products supplier CeramTec;  and Blackstone, which early last year partnered with PSP and CDPQ in the US$6.1 billion buy of hospital staffing provider Team Health.

Other disclosed examples are Apax PartnersApollo Global ManagementLightyear CapitalMBKNew Mountain Capital, Partners Group and TPG.

Stewart says a linchpin of the new strategy is the ability of PSP’s in-house investment pros — led by Simon Marc, head of private equity, and Patrick Samson, head of infrastructure — to “exercise strong judgement and execute rapidly” when picking partners and opportunities.

“We strive to be as non-institutional as possible, to move at the same speed as our GPs,” he said.

Getting bigger

Doing more direct deals is essential to returns and “rounding out diversification,” as well as being “more deliberate about the assets we add to the portfolio,” Stewart said.

It is also key to generating investment volumes that facilitate PSP’s rapid growth.

PSP is the youngest of Canada’s four largest pension systems, overseeing C$139 billion in retirement savings on behalf of federal public employees, including defense and police forces.

Its capital pool, fueled both by contribution flows and investment returns, is projected to exceed C$200 billion by 2026 and C$250 billion by 2029.

Stewart, 61, was recruited to PSP by André Bourbonnais, who was appointed president and CEO in 2015 after running private investments at Canada Pension Plan Investment Board.

Earlier this year, Bourbonnais departed PSP for BlackRock. He was succeeded by Neil Cunningham, previously global head of real estate and natural resources.

Stewart’s career includes serving as a partner at EdgeStone Capital Partners. He also spent 15 years in executive roles in the telecom industry, including as president and CEO of Teleglobe Canada.