PSP overhaul of private equity strategy pays dividends in 2020

PSP Investments generated a one-year return of 28.4% on its PE investments in 2020, compared with a prior-year return of 5.2%.

Public Sector Pension Investment Board’s private equity strategy outperformed last year, lending further validation to a recent shift toward direct investing.

PSP Investments, which holds C$204 billion ($168 billion) of net assets, earned a one-year return of 28.4 percent on its PE investments in 2020, according to a fiscal 2021 report issued this week. This compares against a prior-year return of 5.2 percent.

While performance at this level is by most measures robust, it fell short of a benchmark of 31.7 percent. This was also the case for the portfolio’s five-year annualized return, which came in at 11.3 percent, shy of a 15.1 percent benchmark.

An explanation lies in PSP’s efforts over the past six years to revamp its PE organization.

Starting in 2015, PSP broadened the strategy’s global scope and boosted in-house talent and capabilities, organizing them around investing in high-growth sectors. It also expanded relationships with outside fund and non-fund partners to access new opportunities.

In a 2018 interview with Buyouts, Guthrie Stewart, PSP’s ex-global head of private investments, said the changes were “all about building scale and generating returns.” A key to both goals was an increased focus on direct and co-investments, which today make up roughly half of portfolio assets.

The overhaul transformed PSP’s approach to private equity. Last year, more than 85 percent of managed assets reflected post-2015 investing, contributing to stronger performance. The pension system said it missed its benchmarks because of pre-2015 legacy investments.

Directs drive returns                                 

The PE portfolio’s net assets totaled C$31.7 billion in 2020, up 32 percent from a year earlier. Private equity now accounts for 15.5 percent of all PSP assets.

Simon Marc, PSP Investments

Last year’s gains primarily owe to direct and co-investments across consumer discretionary, financials, healthcare and technology, “which benefited from continued growth, favorable market conditions and successful exits,” PSP said. Most such sectors proved resilient in a virus-roiled market.

PSP deployed C$5.1 billion in the global market in 2020, 45 percent of it channeled through directs. Its deals included an investment alongside Stone Point Capital in SitusAMC, a provider of services and technology to the real estate finance industry.

In addition, PSP joined in Searchlight Capital Partners’ $1.35 billion takeover of Frontier Communications’ Pacific-Northwest assets, creating Ziply Fiber. The deal’s other backers were WaveDivision Capital, BCI and CPP Investments.

PSP also reported a fresh C$3.9 billion commitment to 24 new funds, most of them sponsored by existing partners. The amount will be disbursed over the next few years.

Major PE player

Despite being Canada’s fourth-largest pension system, PSP had a low PE profile before the strategy overhaul. Since then, however, it has acquired stature by investing an unprecedented C$31.3 billion, including last year’s C$5.1 billion outlay.

PSP was in 2020 ranked 14th in Private Equity International’s list of the world’s 100 largest investors in private equity.

PSP’s private-market leadership has undergone change of late. Guthrie, last year appointed vice chair, investment committee, retired in June. David Scudellari, a former Barclays Capital executive, was in 2020 named global head of credit and private equity investments, a move that united the two platforms.

Directing the PE team is Simon Marc, an ex-Permira principal who was last year promoted to global head of private equity. He oversees more than 40 investment professionals operating from offices in Montreal, London and Hong Kong.

PSP manages the retirement savings of federal public employees, including defense forces and the Royal Canadian Mounted Police.