PSP’s Scudellari: ‘It feels a bit like 2015’

David Scudellari, head of principal debt and credit investments at Canada’s PSP Investments, says “a few cracks” in the US market are making things feel a bit like 2015 when private equity deals stalled and PSP – which had just launched its private debt strategy at the time – was able to step in as a “$5 billion start-up” at a time when financing options had thinned out.

Speaking on the opening morning of PDI’s Capital Structure Forum in London, Scudellari said the rating agencies are getting tougher on leverage and worsening ratings are making it harder for CLOs to participate in the market.

He said the chance to fill a funding gap in 2015 enabled PSP to deliver returns of 20 percent-plus in its first year of deployment. The institution has gone on to deploy $10 billion over the last three years and has had a target net return of 14 percent since inception – though Scudellari said he would still be meeting his mandate with high single-digit unlevered returns.

He said PSP writes cheques of $75 million to $1 billion for individual transactions and can do anything from “a revolver to preferred [equity]”. He added: “We can match the capital to the need and we’re getting lots of calls”.

PSP, which has a goal of deploying $20 billion in private credit, has a fund strategy as well as investing directly. It has so far backed 11 credit funds, putting an emphasis on co-investing to make the economics work better. It has backed the likes of AlbaCore, Thoma Bravo and Carlyle Group and said that PSP gained strategic insights from working with managers like these.

PSP has offices in New York and London, with the firm having been busy in London “from day one”. He said the technicals in Europe were more favourable for private credit than in the US and that there was currently a broader range of opportunities for CLOs to invest in.

Scudellari said PSP’s credit portfolio is overweight in technology and software and also has a big exposure to healthcare. “If there’s a recession next year, you want companies that will be fine and will continue to generate cashflow. Things will happen in the next five years so you don’t necessarily want to be exposed to some big capex programme. Too much can go wrong.”

PSP has recently opened a Hong Kong office and, despite the current protests and police crackdown, he believes being in that part of the world is a necessity given its growth potential. However, the organisation is unlikely to have a big credit exposure there. “There are good risk/return opportunities but Asia is an expensive credit strategy and if I had to commit capital to the region I’d probably do it through a fund,” said Scudellari.