PSP and OTPP Selling $1 Billion-Plus PE Stakes

Chris Witkowsky of Buyouts reports Canadian giant PSP Investments shops $1 billion-plus portfolio:

PSP investments is shopping a large portfolio of fund stakes that could total up to around $1.5 billion, according to sources and confirmed by the pension system in a statement to Buyouts.

PSP is among several Canadian pensions in the market with a large LP secondaries. Ontario Teachers’ Pension Plan is also out with a potential $1 billion-plus portfolio sale, sources said, confirming an earlier report by Bloomberg.

The processes are part of a wave of LP sales that have driven the market this year to what are expected to be near-record, or better, activity levels. LP sales accounted for about $40 billion, or 59 percent of activity in the first half, according to Jefferies’ half-year volume report.

“LPs tapped the secondary market both to increase liquidity and to reallocate their private asset portfolios; we expect LP supply to further increase in H2 2024 as pricing continues to improve,” the report said.

The rationale for PSP’s sale is for portfolio management purposes, according to a statement the system shared with Buyouts. The system uses secondaries sales “to optimize portfolio construction and further support future investments,” according to the statement.

Portfolio management can generally mean culling managers with which a seller doesn’t plan future commitments, to make space for new relationships; or even selling down exposure to certain managers that has grown too large.

PSP most recently closed a secondaries sale of about $1.5 billion in 2021 with HarbourVest Partners as lead buyer, Buyouts reported at the time.

The system managed about C$264.9 billion in assets as of March 31 across investments in capital markets, private equity, real estate, infrastructure, natural resources and credit. The system’s private equity portfolio had a net AUM of about C$40.4 billion as of March 31, with a five-year annualized return of 14.8 percent, according to information from PSP.

This article was written in late October and it confirms a trend we have been seeing since last year, namely, Canada's large pension funds are tapping into the secondaries market to get rid of underperforming fund stakes to shore up liquidity and diversify vintage year risk.

Go back to read my comments on BCI's Jim Pittman on staying focused, liquid and agile in private equity and it selling $1 billion of PE holdings to Ardian as well as my comments on CDPQ's head of PE on vintage year diversification and managing liquidity and how it used secondaries market to address overallocation.

Jim Pittman, Martin Longchamps and the heads of private equity across Canada's large pension funds have been quietly selling underperfoming stakes at a small discount to free up monies to invest in better opportunities going forward.

The reason they are able to do this is because the secondaries market has matured and is widely used now to manage portfolio liquidity.

And it's been a tough couple of years in private equity and everyone is feeling the pinch.

For example, Texas Teachers' recently stated it will slash $10 billion from its private equity program.

Again, I caution readers not to generalize as Canada's large pension funds have the right approach and are very selective in the deals they enter.

For example, just today, James Bramwell of CPA practice Advisor reports PKF O’Connor Davies to get outside capital from Investcorp, PSP Investments:

PKF O’Connor Davies is getting an infusion of capital from Bahrain-based private equity group Investcorp and the Public Sector Pension Investment Board (PSP Investments), one of Canada’s largest pension investment managers, the Harrison, NY-based top 30 accounting firm said on Nov. 18.

Financial terms of the deal weren’t disclosed. PKF O’Connor Davies said in a media release that the transaction has received regulatory approval and is subject to other standard closing conditions.

The accounting firm said the deal with Investcorp and PSP Investments “represents a significant milestone” that will help “fuel growth and expand service offerings to enhance the overall client experience.”

Much like other accounting firms that have sold a stake in their business to a public equity group, PKF O’Connor Davies said the injection of funding will “elevate its competitiveness and amplify long-term sustainability” and “provide flexibility for increased M&A activity, as well as investing in cutting-edge technology and new service lines.”

Founded in 1982, Investcorp manages $52 billion in assets, including assets managed by third-party managers. Its investment portfolio includes global consulting firm Alix Partners, as well as Resultant, United Talent Agency, and CrossCountry Consulting.

Established in 1999, PSP Investments manages $264.9 billion of net assets as of March 31, 2024, including a diversified global portfolio composed of investments in capital markets, private equity, real estate, infrastructure, natural resources, and credit investments.

“Since inception, our identity as an organization has been our enduring commitment to service. This investment from Investcorp and PSP further validates that we have an attractive business with a great brand, great talent, and great customers,” Kevin Keane, PKF O’Connor Davies’ executive chairman, said in a statement. “Investcorp and PSP Investments have a long history of backing profitable, industry-leading companies with demonstratable growth avenues and were impressed by PKF O’Connor Davies and the culture that we have built.” 

As ownership rules in the accounting sector have evolved, Investcorp has been seeking the right firm to back, said principal Vitali Bourchtein.

“We were instantly impressed by PKF O’Connor Davies’ leadership team and the exceptional track record of financial performance,” he said. “Providing the organization with additional resources will help accelerate growth and enhance its competitive position in the accounting, tax, and advisory verticals.”

Steve Miller, co-head of North America private equity at Investcorp, added, “In recent years, Investcorp has established itself as a partner of choice for ambitious professional services organizations seeking to grow. Together with PSP Investments, with whom we have a history of investments in the professional services sector, and more than 200 PKF O’Connor Davies partners, we are excited to build upon the organization’s decades of success.”

David Morin, managing director and head of North America private equity at PSP Investments, said PSP “is excited to partner with Investcorp and PKF O’Connor Davies to provide strategic capital and work together in realizing PKF O’Connor Davies’ full potential during their next chapter of growth.”

PKF O’Connor Davies will continue to operate in an alternative practice structure in accordance with applicable professional standards. PKF O’Connor Davies LLP, a licensed CPA firm, will provide attest services, while PKF O’Connor Davies Advisory LLC and its subsidiary entities will provide tax and advisory services.

The accounting firm brought in $377.5 million in revenue during its most recent fiscal year, according to INSIDE Public Accounting.

Capstone Partners served as sole financial advisor, while Levenfeld Pearlstein served as legal advisor to PKF O’Connor Davies. Gibson Dunn served as legal advisor to Investcorp. Weil, Gotshal & Manges served as legal advisor, while McDermott Will & Emery served as regulatory counsel to PSP Investments.

Earlier today PSP put out a press release on this deal stating PKF O’Connor Davies announces a strategic growth investment from it and Investcorp:

New York and Montréal – November 18, 2024 – PKF O’Connor Davies (“PKFOD”) (“the Organization”), one of the nation’s largest accounting, tax and advisory practices, is pleased to announce a strategic growth investment from Investcorp, a leading global alternative investment firm, and Public Sector Pension Investment Board (“PSP Investments”), one of Canada's largest pension investment managers. This transaction represents a significant milestone for PKFOD, adding two experienced investors that will help fuel growth and expand service offerings to enhance the overall client experience. 

This investment will elevate the Organization’s competitiveness and amplify long-term sustainability. The strengthened balance sheet provides flexibility for increased M&A activity as well as investing in cutting-edge technology and new service lines. 

“Since inception, our identity as an Organization has been our enduring commitment to service. This investment from Investcorp and PSP Investments further validates that we have an attractive business with a great brand, great talent and great customers,” said Kevin Keane, PKF O’Connor Davies’ Executive Chairman. “Investcorp and PSP Investments have a long history of backing profitable, industry-leading companies with demonstratable growth avenues and were impressed by PKFOD and the culture that we have built.”  

“In recent years, Investcorp has established itself as a partner of choice for ambitious professional services organizations seeking to grow. Together with PSP Investments, with whom we have a strong investment track record in the professional services sector, and more than 200 PKFOD partners, we are excited to build upon the Organization’s decades of success” said Steve Miller, Co-Head of North America Private Equity at Investcorp.  

“As ownership rules in the sector have evolved, we have been seeking the right platform to back. We were instantly impressed by PKFOD’s leadership team and the exceptional track record of financial performance. Providing the Organization with additional resources will help accelerate growth and enhance its competitive position in the accounting, tax and advisory verticals,” said Vitali Bourchtein, Principal at Investcorp. 

“We are excited to partner with Investcorp and PKFOD to provide strategic capital and work together in realizing PKFOD’s full potential during their next chapter of growth,” added David Morin, Managing Director and Head of North America, Private Equity at PSP Investments. 

Going forward, PKFOD will continue to operate in an alternative practice structure in accordance with applicable professional standards where PKF O'Connor Davies LLP, a licensed CPA firm, will continue to provide attest services and PKF O'Connor Davies Advisory LLC and its subsidiary entities will continue to provide tax and advisory services. 

Terms of the transaction were not disclosed. The transaction has received regulatory approval and is subject to other standard closing conditions. 

Capstone Partners served as sole financial advisor while Levenfeld Pearlstein served as legal advisor to PKF O’Connor Davies. Gibson Dunn served as legal advisor to Investcorp. Weil, Gotshal & Manges served as legal advisor while McDermott Will & Emery served as regulatory counsel to PSP Investments. 

About PSP Investments
The Public Sector Pension Investment Board (PSP Investments) is one of Canada's largest pension investors with $264.9 billion of net assets under management as of March 31, 2024. It manages a diversified global portfolio composed of investments in capital markets, private equity, real estate, infrastructure, natural resources, and credit investments. Established in 1999, PSP Investments manages and invests amounts transferred to it by the Government of Canada for the pension plans of the federal public service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has its principal business office in Montréal and offices in New York, London and Hong Kong.  

For more information, visit investpsp.com 

About PKF O'Connor Davies
PKF O'Connor Davies is a top-tier accounting, tax and advisory practice and member of PKF Global, a global network of accountancy firms. We have a long history of serving domestic and international clients. "Know Greater Value" speaks to the confidence and guidance that our clients realize when they work with us. It reinforces our commitment to delivering the highest levels of value, expertise and service in everything we do. Our clients Know Greater Connections, Know Greater Insights and Know Greater Value. "PKF O'Connor Davies" is the brand name under which PKF O'Connor Davies LLP and PKF O'Connor Davies Advisory LLC, independently owned entities, provide professional services in an alternative practice structure in accordance with applicable professional standards. PKF O'Connor Davies LLP is a licensed CPA firm that provides attest services and PKF O'Connor Davies Advisory LLC and its subsidiary entities provide tax and advisory services. 

For further information, visit: www.pkfod.com  

About Investcorp 
Investcorp is a global investment manager specializing in alternative investments across four asset classes: Private Equity (Mid-Market Buyouts, Growth Investments, and GP Staking), Real Assets (Infrastructure and Real Estate), Credit (CLOs, Broadly Syndicated Loans & Structured Credit, and Middle-Market Direct Lending), and Liquid Strategies (Absolute Return Investments and Insurance Asset Management).  

Since our inception in 1982, we have focused on generating attractive returns for our clients and seeking to create long-term value in our portfolio companies by adopting a disciplined investment process, employing talented professionals, and utilizing the resources of a global institution with an innovative approach.  

We invest capital in our products and strategies, aligning interests with our clients and other stakeholders. We pursue sustainable value creation through our investments and in the communities in which we operate and take pride in partnering with clients to deliver tailored solutions for their needs.  

Today, Investcorp manages $52 billion in assets, including assets managed by third party managers. Investcorp has 14 offices in the US, Europe, GCC and Asia, including, India, China, Japan and Singapore and employs approximately 500 people from 50 nationalities globally.

For further information, visit http://www.investcorp.com/ and follow us @Investcorp on LinkedIn, X and Instagram. 

This is a smart deal, co-investing alongside top strategic partner Investcorp to buy a stake in PKF O’Connor Davies (“PKFOD”), one of the largest accounting, tax and advisory practices in the United States, helping fuel its growth.

I like this deal for several reasons, great stratgic partner and great company in professional services to invest in over the long run.

Alright, let me wrap it up there.

Below, OTPP CEO Jo Taylor, Guggenheim CIO Anne Walsh and Mercer CIO Olaolu Aganga took part in a CNBC Delivering Alpha conference last wekk where they spoke about Finding Alpha over the next four years.

Take the time to really listen to this panel discussion,  a lot of excellent insights and I might come back to it later this week.