Mounties' $117 Billion Fund Bolsters Private Debt Arm

(Bloomberg) -- The Public Sector Pension Investment Board, one of Canada’s largest pension funds, is expanding its private debt team to focus more on investments in distressed companies.

Montreal-based PSP hired Francis Blair to broaden the fund’s capabilities to include rescue financing and other solutions for companies with capital structure challenges. Blair most recently worked as a partner and senior credit analyst at Milford Sound Capital LP and earlier as a managing director at Solus Alternative Asset Management, where he was involved in some of the fund’s largest distressed investments.

PSP’s private debt investments have been largely focused on revolving credit facilities, first and second lien term loans, as well as secured and unsecured bonds. Blair’s hire will let the pension plan get more involved in distressed debt and rescue financing by capitalizing on its relations with the world’s largest private equity funds seeking financing for their portfolio companies.

“PSP is one of the go-to people in preferred equity solutions, because there is a more limited number of players in this space,” said Jeff Rowbottom, managing director at PSP Investments USA, in a phone interview from New York. “We are very happy to structure, put together and speak for the entire deal, but often times the private equity firm will desire to have other players and we play well with other investors.”

Private Debt

PSP’s private debt arm had C$8.9 billion ($6.8 billion) in assets under management at the end of March, with 75 percent of them located in North America, and the bulk of the remainder in Europe. Healthcare, technology and industrials were the sectors that dominate its portfolio.

Pension funds around the world have been increasing investment in private debt in recent years as it gives them the opportunity to deploy cash in long-term assets. Although it’s less liquid than public assets, private debt generally offers higher returns, a crucial incentive at a time of near record-low interest rates.

While the Federal Reserve and the Bank of Canada have been gradually tightening monetary policy, rates are still relatively low by historical standards. And as the move into private debt is become more widespread, some areas like middle-market corporate lending get overcrowded, according to advisory firm Willis Towers Watson.

In distressed debt, rival firms have been hindered by a shortage of troubled companies, which have been kept afloat by cheap interest rates and lax lending standards. At midyear, performing distressed debt was at its lowest level since 2014, according to a Bloomberg Intelligence tally.

“There’s still a lot of room to run in private credit,” Rowbottom said. “There’s a lot of capital that is being raised right now, and there’s going to be a lot of transactions, so we think we have a lot of tools to be relevant.”

Debt Solutions

Blair’s work from New York will be focused on providing solutions rather than actively trading distressed assets because that’s where long-term capital can be best deployed, said Rowbottom, who was the head of capital markets for North America at KKR & Co. before joining PSP in February 2016. The pension fund will be looking for deals ranging from $75 million to $1 billion.

Some examples of PSP’s activity in this space include investments in video telematics company Lytx Inc. and a subsidiary of Stone Caynon Industries LLC. It also supported USI Insurance Services in acquiring a rival brokerage from Wells Fargo & Co., Rowbottom said.

PSP’s private debt arm has offices in New York, London and Montreal, which employ 30 investment professionals. It has already worked with more than 40 private-equity firms, including almost every major entity in that space, Rowbottom said.

“Most pension funds are not as well known for being creative and solutions-oriented,” Rowbottom said.

PSP, which invest funds for the pension plans of the Canadian public service, the armed forces and the Royal Canadian Mounted Police, had C$153 billion in net assets at the end of March.

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