Canada’s Public Sector Pension Investment Board has doubled its private debt allocation over the past year alongside the growth of its wider unlisted asset portfolio, as it lines up the next phase of its international expansion.
Better known as PSP Investments, the C$153 billion ($118 billion) retirement fund has prioritised readying its first Asia office this year, having increased its headcount in London in 2017, it said in its latest annual report.
Published late on Tuesday, the report also shows that PSP posted above-target returns across most of its public and private market portfolios.
Overall PSP posted 9.8% net return in the year to March 31, 2018 and a 10-year net annualised return of 7.1%. PSP’s 50.1% allocation to public assets returned 8.3% over its benchmark of 7.7%. Private investments generated the strongest performance, although the private equity portfolio underperformed its benchmark.
Notably, the fund saw its private debt allocation rise to C$8.9 billion from C$4.4 billion and return 8.2% in fiscal year 2018, well over its benchmark of 2.3%.
The private debt portfolio accounted for 5.8% of total AUM as of March 31. It has grown fast, having been set up in late 2015 as a separate asset class portfolio under former PSP chief executive Andre Bourbonnais.
That resonates with a broader trend seen over the past couple of years as asset owners globally ramp up investments into private debt assets such as senior loans, mezzanine debt and infrastructure debt. It also in keeping with the fact that other large Canadian pension funds have large and growing teams investing in private assets generally.
OTHER PRIVATE INVESTMENTS
PSP’s overall exposure to private markets is now close to half of its AUM (46.7%), reflecting the broadening search for yield among institutional investors globally.
Like its private debt investments, PSP's infrastructure and natural resources allocations also comfortably beat their benchmarks in the last fiscal year, with the latter returning 11.2% (versus 3.1%) and the former adding 19.3% (versus 12.1%).
The infrastructure and natural resources portfolios grew by roughly 40% and 30% to C$15 billion and C$4.8 billion, respectively, underlining how private assets remain front and centre for PSP under Neil Cunningham, who took over as CEO from Bourbonnais in February. Cunningham was formerly PSP’s global head of real estate and natural resources.
That said, PSP’s private equity investments – which grew by C$3.5 billion to C$19.4 billion – fell short of target last year, returning 12.9% against their 17.6% benchmark.
The fund also acknowledged in its annual report that returns generally are likely to fall in the coming years as competition for assets grows. Hence the Treasury Board of Canada lowered PSP’s long-term return objective to 4.0% from 4.1% in fiscal year 2018 and introduced a real return objective of 3.3% for the next 10 years.
Meanwhile, PSP aims to establish a presence in Hong Kong or Singapore by the end of 2018, Bourbonnais said last year, and the new branch is likely to cover all asset classes with a staff of between 10 and 20. The fund is also considering opening a satellite office in Australia to look after its real asset investments there, he had said.
A PSP spokeswoman declined to comment on the fund's expansion plans, which she said were still being finalised.
Meanwhile, PSP’s larger Canadian peers – CPPIB, CDPQ and Ontario Teachers – have had outposts and investment staff on the ground in Asia for several years, and other major asset owners look set to follow them.
The Texas Teacher Retirement System, a $151 billion pension fund, is considering establishing its first Asia office in either Hong Kong or Singapore in the coming year or so.
More state institutions are looking to make such moves eastwards to help cut out the fund house middle man and do more direct investing, in order to reduce management fees, a Hong Kong-based recruiter told AsianInvestor.