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 $4.4 billion last year. Of the total, more than half went to co-sponsorships and co-investments.
Dealmaking was mostly in the United States and Europe, engaging such companies as ceramic-products supplier CeramTec, medical-lab-services operator Cerba, and early-childhood educator Learning Care.
The activity marks a third year of unprecedented PE outlays, totalling $9.9 billion since 2015.
The portfolio finished the year with $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 $3.3 billion, two-thirds of it on a direct basis. Portfolio assets increased to $15 billion, up 35 percent from a year ago.
Combined PE and infrastructure assets, standing at $34.4 billion, are double what they were in 2015, when both asset classes were under-allocated.
As PE Hub Canada 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 PE Hub Canada 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 defence forces and the Royal Canadian Mounted Police, earned an overall one-year return of 9.8 percent in fiscal 2018. That helped lift total net assets to $153 billion from a previous $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.