PSP Investments Moving Into Asia?

Barbara Shecter of the National Post reports, PSP Investments seeking Asia base but London remains key hub despite Brexit fears:

Canada’s Public Sector Pension Investment Board is establishing a base in Asia to pursue deals in private debt and equity, real estate, and infrastructure, mirroring a strategy already deployed in London.

The office, to be located in either Hong Kong or Singapore, will complement a London hub that is to be expanded by as much as 50 per cent in spite of the looming prospect of Brexit, André Bourbonnais, chief executive of PSP Investments, told the Financial Post.

“We’re looking very actively to have a presence either in Hong Kong or Singapore,” he said, adding that both the Asia base and the expansion of the London office to as many as 45 people will be in place by the end of the current fiscal year in March.

“London is and will remain a key financial market,” Bourbonnais said, noting that British politicians have recently soothed Brexit fears with reassurances that bankers and dealmakers from other parts of the European Union will be allowed to stay if and when Britain exits the EU.

While some banks have pulled staff, it’s mostly been back and middle office employees, Bourbonnais said.

“People that are client-facing will remain there,” he said, adding that London continues to be a draw for top deal-making and financial talent.

“The talent pool that’s available is so much larger than (those willing to locate in) Canada, let alone Montreal,” Bourbonnais said.

In a wide-ranging interview, he said the geographic expansion at PSP Investments will be complemented by a continued focus on breaking down barriers within the pension management firm to find investments that benefit the portfolio as a whole.

Those aims were at the top of his list in March of 2015 when he took the top job at PSP, which invests funds for the pension funds of Canada’s public service, the Canadian Armed forces and reserves, and the Royal Canadian Mounted Police.

Another priority was to establish private debt as a new asset class at the pension investment manager, which had $135.6 billion in assets under management on March 31, the end of its most recent reporting period.

“In this environment, it’s a very good asset class, as evidenced by the $4 billion or so that we’ve been able to deploy,” Bourbonnais said, adding that the new business also led PSP Investments to establish an office in New York.

Prior to taking his current job, Bourbonnais was global head of private investments at the much larger Canada Pension Plan Investment Board, a job he says influenced his vision for the public sector pension manager he now runs.

The CPP Fund has more than $300 billion in assets, and deals are sourced from CPPIB’s seven international business hubs in locations including London, New York, and Hong Kong.

In addition to the geographic coverage, Bourbonnais says he was also influenced by his former employer’s focus on the total portfolio, a strategy he introduced at PSP Investments.

“The place had been built in a very entrepreneurial fashion where… nobody was really looking at the total fund,” he said. “One of the big objectives I had was to break those silos and force people to work together at the beginning, but now it’s becoming much more spontaneous and natural for them to do it.”

He said the more co-operative strategy was evident in a deal struck in March to acquire Vantage Data Centres with partners Digital Bridge Holdings LLC and TIAA Investments.

“We couldn’t quite figure out if it was private equity, if it was infrastructure, if it was real estate, so we stopped the debate, we put all three groups together, and we did that transaction with our partners,” Bourbonnais said, adding that other prospective transactions now in the pipeline would combine dealmakers from private debt and equity, and real estate and infrastructure.

“We’ve created a structure where a group of people including myself are looking at … (transactions) that don’t quite fit nicely in one asset class but are beneficial to the total fund,” he said.

“We really foster collaboration between asset classes and (are) really making sure people work together and are rewarded for it.”

PSP’s one-year total portfolio net return of 12.8 per cent generated $15.2 billion of income in fiscal 2017, net of all investment costs. Gross portfolio return stood at 13.2 per cent, compared to a one per cent return in fiscal 2016.

I missed this article which came out at the end of June but it doesn't surprise me. In fact, when I recently examined whether pension funds are displacing private equity funds, I wrote this:

So, are pension funds displacing private equity funds? Yes and no. Where they can compete effectively, they will and this is most notable in Canada where large public pensions have the right governance which allows them to hire industry experts and pay them properly.

But in the buyout world, large private equity funds reign supreme, and there's not a pension in the world that will ever displace them from their bread and butter. It won't ever happen, ever, and the reason is simple, when there's a major deal on the table, the first phone calls bankers make is to Schwarzman et al., not the CEO of a major pension fund.

In other words, while Canada's large pensions can compete with private equity funds in private debt, ramping up their operations in the US and Europe and pretty soon Asia, they will never compete with private equity titans on major deals and still need them to generate returns in the traditional buyout space where they invest and co-invest with top private equity funds.

But there is no question that large Canadian pensions are increasingly muscling into private debt an they are delivering stellar results in this area which was once dominated by top PE funds. Just look at the results of CPPIB and PSP Investments in fiscal 2017 to underscore this point.

PSP is basically catching up to CPPIB, moving into Asia and taking a total portfolio approach. You need boots on the ground to find the right partners and deals, especially in Asia.

The good news is Asian private equity has found something good about the region's aging population, and private equity can take off in this region. There is no doubt PSP, CPPIB and other large Canadian pensions will team up with the right partners to gain access to these deals.

Apart from investments into funds and co-investments alongside them to lower fees, PSP will look to set up private debt operations in Asia and this too can be profitable if they have the right team originating these debt deals.

This is all positive and part of PSP's strategic long-term plan. Once operations are set up and they gain prominence in the region, it will add geographic diversification in a region with real long-term growth potential.

Will there be bumps along the way? You bet. You can execute the best strategy, hire the best team and still suffer setbacks along the way, especially in Asia where private markets are opaque, often dominated by a handful of wealthy families.

Still, over the long run, this move will pay off in spades and PSP needs to move into Asia now to capitalize when markets there get whacked and opportunities in private markets arise.

One last note on PSP. I've been getting emails from a few people asking me about where its former CIO, Daniel Garant, went. I have no clue, none whatsoever. Institutional Investor recently published an article stating he abruptly resigned, which may or may not be true.

Rumors have swirled that he will be replacing Roland Lescure at the Caisse where they will groom him to take over Michael Sabia's job. I also heard rumors that he will join Gordon Fyfe and Jim Pittman at bcIMC where he will assume the role of CIO.

So far, these are nothing but rumors, nothing has been announced anywhere. Mr. Garant is a big boy, he can take care of himself and I'm certain he will land on his feet (they all do). I've never spoken to the man nor am I privy to his future plans. Just because this blog is called "Pension Pulse", doesn't mean I know everything going on at Canada's large pensions (trust me, I don't want to know everything).

Below, from the Milken Institute conference, a panel discussion on the coming US infrastructure boom featuring PSP's CEO André Bourbonnais and Michael Burke, Chairman and CEO at AECOM.