PSP Investments' Strikes a Few Deals

IPE Real Assets reports that Aviva Investors and Public Sector Pension Investment Board (PSP Investments) just extended their partnership with an agreement to invest up to £250m in commercial property in eastern England:
The companies said the new venture will acquire a mix of ground-up and standing assets located in the CB1 Estate in Cambridge, a master-planned development covering 26 acres.

The acquired assets include 50/60 Station Road, a fully-let 167,000sqft development completed in April 2019 and 30 Station Road, a pre-let 81,500sqft scheme.

Construction commenced in September, with completion scheduled for the third quarter of 2021.

Aviva Investors will act as development manager and asset management partner, working alongside Brookgate as the developer.

Aviva Investors and Canadian pension investment manager PSP Investments in 2015 invested in a portfolio of commercial properties in central London, currently worth over £400m.

Daniel McHugh, managing director, real estate, Aviva Investors Real Assets, said: “Station Road provides exposure to high-quality assets with a range of risk and return profiles, and we look forward to growing this strategy with PSP Investments.”

Stéphane Jalbert, managing director, Europe and Asia Pacific, real estate investments, PSP Investments, said: “Building on our existing partnership with Aviva, PSP is continuing its strategy of investing in key innovation markets.

”Cambridge is one of the UK’s leading knowledge clusters for artificial intelligence and life sciences, and we believe the regeneration of the Station Road area will outperform in the long term.”

Melanie Collett, head of real estate asset management, Aviva Investors Real Assets, said: “We continue to see high demand for space from many global firms, with cutting-edge technology and business services firms among the occupiers in our properties as we create leading locations that cater to businesses, communities and individuals.”
It's Remembrance Day in Canada, Veterans Day in the United States, so I figured I'd look into what has been happening at PSP Investments since they are in charge of managing the retirement funds of the Canadian Armed Forces and the Reserve Force (see PSP's contributors here).

Exactly four years ago, I discussed PSP's global expansion and referred to PSP's joint venture with Aviva Investors:
[..] PSP just formed a joint venture with Aviva Investors to invest in central London real estate:

Under the equal partnership, Aviva Investors’ in-house client Aviva Life & Pensions U.K. has agreed to sell 50% of its stake in a central London real estate portfolio to PSP Investments. Aviva previously owned 100% of the portfolio. The portfolio consists of 14 assets across London, made up of existing real estate or those with planning consent.

Aviva Investors will manage the assets and development for the joint venture.

The spokeswoman for PSP Investments said financial details of the transaction are confidential. The net asset value of PSP Investments’ real estate portfolio as of March 31, was C$14.4 billion ($11.4 billion,) she said.

“This investment is consistent with PSP Investments’ real estate strategy to invest in prime and dynamic city centers that we expect will outperform in the future, and is complementary to PSP Investments’ existing portfolio in London,” said Neil Cunningham, senior vice president, global head of real estate investments at PSP Investments, in a news release from Aviva Investors. Further details were not available by press time.

Aviva Investors has more than £31 billion ($47.8 billion) of real estate assets under management. PSP Investments manages C$112 billion of pension fund assets for Canadian federal public service workers, Canadian Forces, Reserve Force and the Royal Canadian Mounted Police.
I don't know enough details about this deal to state my opinion but I have to wonder why Aviva Investors is looking to unload half its stake and why PSP is buying prime real estate in London at the top of the market (trust me, I know how out of whack London's real estate prices have become).

But Neil isn't a dumb guy, far from it, and I have to take his word that he expects these assets to outperform in the future and that they are complementary to PSP's existing portfolio. I hope so because I'm sure PSP paid top dollar (more like pounds) to acquire these assets.
Well, Neil Cunningham most certainly isn't a dumb guy, he did an outstanding job managing PSP's massive real estate portfolio for over a decade before being nominated President & CEO after André Bourbonnais left PSP to join Mark Wiseman at BlackRock.

PSP's joint real estate venture with Aviva Investors turned out to be another great deal for both parties. PSP invested in Aviva's real estate assets in London and Aviva raised money to start a new fund developing new properties (while maintaining 50% stake in its prized London properties).

This deal in Cambridge is equally interesting because Cambridge is a well-known knowledge hub, a leading center for artificial intelligence and life sciences.

Why are these two sectors so critically important? Check out the 10-year performance of the S&P 500's major sectors, courtesy of barchart:

As you can see, Technology (XLK), Consumer Discretionary (XLY) and Healthcare (XLV) vastly outperformed the overall market over the last ten years (Note: Amazon makes up 22% of Consumer Discretionary ETF while biotech stocks helped boost the performance of healthcare sector).

The point I am trying to make is technology and innovation in the broadest sense are critically important to the overall economy, whether it's Cambridge, England or Toronto, Canada or Boston, Massachusetts or San Francisco, California.

I keep referring to this article Don Wilcox wrote earlier this year for Real Estate Exchange on how tech will likely be Canada’s savior if a recession hits. He was citing remarks that CBRE’s Paul Morassutti stated at the RealCapital conference in Toronto:
Morassutti, CBRE’s vice-chairman of valuation and advisory services, said the rising interest rate environment, combined with historically high global debt, will undoubtedly lead to a reckoning. However, he said economies positioned to benefit from new technologies and lifestyle trends should weather the worst of whatever storms are coming.

He noted the innovation sector extends well beyond what many people think of as traditional “technology” into virtually every aspect of Canadians’ lives.

“Tech has become so ubiquitous across Canadian industries the true impact the tech sector has on Canada’s economy has been understated. CBRE research estimates that for every tech employee hired at a tech firm between 2012 and 2017, there were three more tech employees hired by non-tech firms.

“Loblaws for example, a grocer, employs almost a thousand people in its AI digital division.

“When you look at it this way, Canada’s tech sector is exceptionally diverse and has a multiplying effect on the economy. But even more important is the rate of growth. Over the past 10 years, tech has grown at more than 2.5 times the pace of the energy sector and three times the overall economy.”

Support for innovation from both the private sector and governments has made Canada a true leader in technology and innovation — and that is driving many of the commercial real estate trends today across the country. He pointed out Canada was the first country to create a national artificial intelligence strategy, and the creation of incubators such as MARS district in Toronto opened the door for innovators to become established and grow.
You can say the same thing about the tech sector in all developed economies, including the UK where some of the top minds in artificial intelligence and life sciences reside in Cambridge (the other top minds reside in Cambridge, Massachusetts and Silicon Valley).

So, this is a real estate deal with an innovation theme, much like CPPIB's joint venture to develop Platform 16, an urban office campus in San Jose, California.

In another major deal, in early October, PSP Investments announced it was taking over Webster Ltd., an Australian agribusiness company, for A$854 million:
While the PSP already owns 19.1 per cent of Webster’s ordinary shares, its subsidiary PSP BidCo is acquiring the total remaining ordinary shares for A$2 per share, which is a 57 per cent premium on Webster’s most recent closing price. It will also buy all Webster preference shares on issue for A$2 in cash per share through a separate arrangement.

The company operates walnut and almond orchards in New South Wales and Tasmania, and also owns land for cotton and other annual crops, cattle and Dorper sheep production, a water entitlements portfolio and an apiary business.

Maurice Felizzi, managing director and chief executive officer at Webster, said the PSP was the logical owner of Webster’s portfolio given the fund’s focus on long-term growth. “We are encouraged by their understanding of our business and its ongoing importance to regional and rural communities in Australia,” he said in a press release. “PSP Investments has a proven track record in managing and investing in agricultural assets over the long term for sustainable value creation and therefore we believe this transaction represents a positive outcome for all stakeholders in our business.”

The purchase is part of the PSP’s natural resources group, which directly invests in agriculture, timber and related opportunities around the world.

If the deal is approved by shareholders, Webster will transfer certain assets to a newly created PSP group entity called KoobaCo for a value of A$267.7 million, plus the net working capital acquired with the business.

Existing investors Belfort Investment Advisors Ltd. and Verolot Ltd., which own 12.5 per cent and 10.7 per cent of Webster’s ordinary shares, respectively, will be offered the opportunity to acquire a 50.1 per cent ownership stake in the new company.
This is a huge deal and an interesting one. Yannick Beaudoin is the Managing Director, Natural Resources, at PSP and his team are slowly putting together great deals like this one (Note: Darren Baccus is the Senior Vice President and Global Head of Real Estate and Natural Resources).

As an avid drinker of a morning shake which consists of frozen blueberries, almonds, walnuts, pumpkin seeds, coconut milk and water, I can attest to the health benefits of eating properly. This health trend is here to stay and will only grow larger as more and more people get informed on how to eat properly and the importance of diet, along with moderate exercise and good quality sleep.

Also in early October, PSP closed the largest private construction loan in Washington, D.C. history alongside Hoffman-Madison Waterfront:
The first phase of the wharf, a waterfront neighborhood that includes residential, hotel, office, retail real estate and public spaces like waterfront parks and piers, opened in 2017. This latest loan is for the second phase of its development.

The Goldman Sachs Group Inc. led the non-recourse transaction with syndicate members Starwood Capital Group, Mack Real Estate Group and Pentagon Federal Credit Union.

“With Goldman Sachs, we’re setting a new high bar for project financing in Washington,” said Kristopher Wojtecki, managing director of real estate investments at PSP Investments, in a press release. “We are now in an even stronger position to realize the full potential of Washington, D.C.’s waterfront.”
In mid October, Apax Partners together with CPPIB and PSP Investments, announced the completion of the sale of Acelity and its KCI subsidiaries to 3M for $6.725 billion (see my post on this sale here):
Since 2011, Apax and its consortium partners worked to reshape Acelity from a loose collection of businesses into a focused global leader. This was achieved through a strategic M&A program which included targeted acquisitions as well as the disposals of non-core businesses. In addition, a range of activities were undertaken to accelerate organic growth, including investments in R&D, medical education, clinical studies, and the expansion of its sales force. The result of these initiatives transformed Acelity into the world’s largest wound care company focused on advanced wound care, including negative pressure wound therapy.

Steven Dyson and Arthur Brothag, Partners at Apax Partners, said, “We are proud of our work with Acelity and our consortium partners. In many ways, this transaction represents what Apax seeks to achieve: namely, developing a high conviction thesis through sub-sector insights, forming a strong partnership with a talented management team, and working together to transform a business to become the global leader in its space. We wish Acelity well and look forward to watching the company continue to thrive under new ownership.”

R. Andrew Eckert, CEO of Acelity during the ownership of the Apax Funds and its consortium partners, said: “It has been a pleasure to work with Apax and its consortium partners. They have demonstrated a very strong understanding of our space and helped us reshape our business and invest to capture significant growth. It’s incredibly fulfilling to reflect on the rapid expansion in innovation and new products Acelity has delivered to the marketplace in this time. I especially want to recognize the Acelity workforce for their dedication to improving patients’ lives worldwide in bringing these new therapies forward.”
In late October, PSP and Alberta Teachers’ Retirement Fund announced another huge deal, the acquisition of all issued and outstanding common shares of AltaGas Canada:
The Canadian company holds natural gas distribution utilities, as well as renewable power generation assets.

In the transaction, the cash offering of $33.50 per common share is an approximate 31 per cent premium on AltaGas’ closing price as of Oct. 18, 2019. The deal puts the company value at around $1.7 billion.

“We are very pleased to have entered into an agreement to acquire ACI in partnership with ATRF,” said Patrick Samson, managing director and head of infrastructure at PSP Investments, in a press release. “ACI’s business comprises a diversified portfolio of high-quality regulated natural gas utilities and long-dated contracted renewable power assets that are well aligned with our long-term investment strategy. We look forward to supporting the company, its management team and all of its stakeholders as ACI continues to grow and succeed.”

Currently, the deal is subject to shareholder approval, as well as certain regulatory approvals by the Alberta government.
Patrick Samson, Managing Director and Head of Infrastructure at PSP, has huge responsibilities and striking a deal of this magnitude is a major undertaking for him and his team (he should be an SVP).

Now, I don't know how the "hijacking" of Alberta Teachers' Retirement Fund will impact this deal but whether it's ATRF or AIMCo, PSP will work with its partner in Alberta (there seems to be a lot going on in Alberta these days).

Now, following my comment on the departure of Nathalie Bernier from PSP, a public sector union member in Ottawa asked my thoughts and informed me that PSP will be delivering a report to the Public Service Pension Advisory Committee (PSPAC) in Ottawa on November 19th, 2019.

As I stated to this union member who contacted me, when an award winning CFO leaves at the same time as the COO (Alain Deschênes), you'd bet I'd be asking Neil Cunningham and the senior managers there some very tough questions.

But I also told him while it raises suspicion when a CFO & COO of a major pension fund depart at the same time, you have to give the CEO of PSP the benefit of the doubt and hear out his explanation. Like I stated, Neil Cunningham isn't the type of guy who takes these big decisions on a whim.

Also, I was told the La Press article got it wrong and that these positions were not abolished but the article states this came straight from PSP in an email, so it's confusing to say the least.

Tonight, right before posting this comment, I checked PSP's executive team on its site and David J. Scudellari remains the Senior Vice President and Global Head of Credit Investments and Interim Chief Financial Officer.

Needless to say, a pension fund the size of PSP cannot survive without a dedicated CFO and COO. It's not possible and David J. Scudellari while fully qualified shouldn't carry both hats of a senior investment officer and CFO.

Why not? Well, he has more important duties like focusing all his attention on PSP's global credit investments and more importantly, from a governance angle, you can't have the head of any major investment activity also be responsible for how they value investments (that's just wrong).

Again, Neil Cunningham and David Scudellari know all this, it's common sense, and from what I heard, there is already a process to find a new CFO and COO (the longer it takes, the worse it looks).

Lastly, since it is Remembrance Day in Canada and Veterans Day in the US, let me end with this story about a young man who left Crete at the age of 17, took a boat to the United States to work at a factory in Cedar Rapids, Iowa where they were making starch for shirts.

During World War I, he enlisted in the US Army, survived the horror of that war and came back to the US to work right outside Chicago in Argo, Illinois where he worked as a mechanic for a big company that made sewing machines (Pressinger).

After working for a few years in the US, he then moved back to Iraklio, Crete where he fell in love and married an amazing lady and settled down to have to have two children.

During his golden years, he received a great pension from the US Army. When he died at the age of 83, his widow received that pension till she died.

Those two people were my grandfather, Leonidas Kolivakis, after whom I was named and my grandmother, Maria (Perakis) Kolivakis after whom my sister is named.

Till this day, I remember my grandmother speaking very highly of the United States saying their Army pension really helped her get by after my grandfather passed away. I even remember seeing the checks from the US Army in US dollars which when converted to Greek drachmas, turned into a very decent pension which she added to a few income properties my grandfather left behind.

I share this story just to say this, behind every pension is a person who deserves to retire in dignity and security, just remember that.

Below, Dawna Friesen hosts coverage of Remembrance Day ceremonies from the National War Memorial in Ottawa as Canadians pay tribute to our veterans who served and sacrificed for our country.

We should always remember those who sacrificed so much so we can live free from tyranny and enjoy living in one of the greatest countries.