PSP Investments launched its $2.6 billion private debt platform in New York in November with a mandate to manage funds contributed by the public servants of Canada since 2000. The platform will open a London office this year before possibly expanding into Asia in the future as it aims to grow towards $20 billion in order to keep pace with a pension fund base expected to quadruple by 2030.
What kinds of investments have you been looking at?
Since I've been here we've looked at 150 opportunities and we've committed to 11. I have a very broad and flexible mandate. It could be all primary, it could be all secondary, it could be first lien, second lien, unsecured, mezzanine; it's a very fulsome debt mandate and that's part of what makes us different from a lot of the other funds out there.
At a lot of the funds you can be a unitranche person only or first lien only or mezz only, so when we get a phone call from either an investment bank or a sponsor, we can play the whole capital structure or we can focus on the one part of the capital structure that is the most challenging.
What we try to do, which also makes us a little different, is structure win-win outcomes. I think a lot of people come to this sport and see it as a zero-sum game. We don't believe that is the right strategy.
What is the average loan size in your direct lending programme?
Average ticket size is about $100 million to $150 million. Right now, we are building the business and I'm underinvested in the asset class, so I'm happy to be bigger.
In the last few weeks we've committed $250 million to one deal, we've committed $300 million to another deal. We're the new kid on the block, so we want to make sure we're providing real value to the sponsor or the investment bank, or whoever is the party that's proposing the transaction.
What are your return targets for direct lending?
More than half of my portfolio will be first lien, in that 7-9 percent bucket. So it's not in the fast money, term loan B covenant-light area of the market, it's a little more storied credit or a little more levered situation.
A lot of middle-market lenders, they can only write a $50 million or $75 million cheque, so they can't really solve their client sponsor's real problem. We can fill in the rest and that's pretty powerful for those platforms. A lot of these commitments are: “Here's my indicative quote, but from that quote I can add 150- 200 basis points to it because I've got three to five months of closing timeframe risk.”
If they partner with us, we can say: “You're done, there's no economic surprises on this deal.”
That will continue to be an important aspect of our business plan.
Which industries do you like?
We like software and we like business services, where you have a dominant position. We like businesses that have very good free cashflow profiles and aren't heavily cyclical. That's not to say we wouldn't do a cyclical deal, we would just have to be absolutely convinced that we couldn't lose money. That gets to either your gearing or where you are in the capital stack.
We are really looking for businesses that even in a bad recession, like 2008-09, have a worst case break-even cashflow. We're starting to look at energy now, not that today is the day to make the move, but we're starting to do our work and I would think in the next nine months we'll do something in energy.