The entrepreneurial investor

“One of our comparative advantages as an institution has to be behaving in a non-institutional way – being agile, responsive and transparent,” Guthrie Stewart states emphatically during a recent interview. “As a newcomer to the organisation, it’s something I believe very strongly. And I think it’s something we have and something we can build on.”

That describes one aspect of Stewart’s role as senior vice-president and global head of private investments, a position he assumed in September. He is in charge of private equity, infrastructure and natural resources, three asset classes that before his arrival were separate and managed by divisional heads.

“One of the benefits of bringing them together, although they still function quite distinctly, is we now have a greater sharing of knowledge and a greater sharing of insights,” he explains. “We also have more flexibility in how we look at assets. If something doesn’t fall neatly within infrastructure but has infrastructure characteristics we can nonetheless look at the opportunity quite aggressively, if it’s a good one.”

Formerly a partner at Canadian private equity buyout firm Edgestone, Stewart is familiar with being flexible and agile. While at Edgestone, he covered everything from electronics to food to airlines. But in addition to that experience, he also brings a wide range of skill sets to PSP Investments, thanks to a legal background – he began his career as a corporate lawyer at Osler – and a background in telecommunications, which he acquired as one of the founding officers of BCE Mobile Communications.

“It was a very easy decision for me,” Stewart replies when asked about his decision to join PSP. “If you look at my past, I’ve been involved in growth opportunities and building teams. Those are readily the two themes that attracted me to PSP: that it’s a global growth story and that it’s a story of building out teams and external relationships.”


Looking at PSP’s relatively short history, its trajectory has been impressive. In March 2015, PSP’s total portfolio stood at C$112 billion ($87.4 billion; €77.6 billion) – more than twice the C$50 billion of assets it managed just three years earlier.

The pension’s growth to date can be attributed to two factors, according to Stewart: predominantly through performance and investment income, and from positive inflows the government contributes to the pension fund.

Having been founded 15 years ago, PSP only represents liabilities after 2000. “This means we’re in the enviable position of having C$3 billion to C$4 billion a year in positive inflows,” Stewart comments.

PSP’s infrastructure portfolio has grown more gradually. In 2012, it accounted for about 5.5 percent of total assets under management, and now stands at 6.5 percent. According to PSP’s website, the target allocation is 13 percent.

“We’re in the process of adjusting the target to what we think is reasonable,” Guthrie states but gives no indication whether a revision – either up or down – is in store. “You’ll see when we publish our results [in late July] that our infrastructure portfolio has shown significant growth in the past year.”


Looking over the past 12 months, one does not need to wait for the annual report to see that PSP has been busy with new infrastructure investments.

Just a week before our conversation, which took place at PSP’s Montreal headquarters on a sunny June afternoon, the pension fund manager had closed on a $1.2 billion deal. The transaction saw PSP acquire a portfolio of 12 hydropower plants with a combined capacity of 1.4GW. The plants, acquired from the Engie Group, are located on the Connecticut River in Massachusetts and the Housatonic River in Connecticut.

The portfolio, the second-largest privately-owned hydro portfolio for ISO New England, the region’s grid operator, benefits from Renewable Energy Credits.

Renewable energy features prominently in PSP’s infrastructure strategy, representing about 25 percent of the portfolio. “We view it as a growth opportunity but it’s also an area in which we have expertise,” Stewart points out. “One of the big stories of our infrastructure strategy is developing sectors of expertise and platforms.”

In the case of the New England hydropower assets, that platform is H2O Power, in which PSP holds a 93 percent stake. The balance is held by BluEarth Renewables, a subsidiary of Ontario Teachers’ Pension Plan.

“H2O started in Canada but had moved into the US before the Engie deal, with the acquisition of two hydro plants along Pennsylvania’s Allegheny River in February 2016,” Stewart explains, referring to two run-of-river hydroelectric facilities that comprise 31.5MW of baseload nameplate capacity. PSP had acquired them in May 2015 before transferring ownership to H2O.

Another renewables platform launched around the same time last year is Cubico Sustainable Investments, a joint venture equally owned by PSP, Spanish bank Banco Santander and Ontario Teachers’ Pension Plan. Based in London, the company invests primarily in wind and solar projects and to a smaller extent in water infrastructure.

“At the moment, Cubico focuses on Latin America and Europe, but we’re also looking at opportunities in the US,” Stewart says.

In January, Cubico made its first investment in Brazil, acquiring the 182MW Caetés and the 210MW Ventos de Araripe 1 wind farms from developer Casa dos Ventos for 2 billion reais ($588.3 million; €522.8 million). At the same time, Cubico announced the opening of an office in São Paulo.

Even more recently, however, in May, PSP launched a roads platform. It did so by acquiring the concessions business of Isolux Infrastructure, a subsidiary of Spanish developer Grupo Isolux. PSP had initially invested €500 million in the company in 2012 when it acquired a 19.23 percent stake. According to Stewart, in addition to toll roads, Isolux Infrastructure also invested in energy.

“It’s fairly public knowledge that Grupo Isolux has been under some financial constraints, therefore they were not really able to follow our growth vision,” Stewart remarks. “So it became a natural conversation that we would split the portfolio. We were very happy to engineer that split and take the toll road assets and rebrand it as Roadis,” he explains. The platform comprises a portfolio of 1,644 km of roads across nine concessions located in Brazil, India, Mexico, Spain and the US.


H20, Cubico and Roadis all serve to illustrate a fundamental component of PSP’s strategy.
“As an institutional investor, we believe fundamentally in doing what we’re good at and then trying to extend that by having great partners – partners who are able to add operational expertise and increase the value of investments,” Stewart says.

“It’s one thing to make the investment, but really the proof in the pudding is when you increase the value of the investment, or capture value, as we like to say.”

Capturing value has become even more important as the infrastructure space has grown not only more competitive, but also increasingly affected by technological change.

Some of the examples Stewart offers are the digital revolution and energy storage technologies; automated vehicles and what he calls “the explosion” of big data in telecoms. “All of this means that when investing in infrastructure you need to have, as owners of these assets, the expertise to think about: ‘How do we improve the asset or the value of the investment and how do we understand these transient changes?’”

That is where good partners come in. “We manage four airports in Europe,” Stewart says, referring to Athens, Budapest, Dusseldorf and Hamburg, in which it participates through its investment platform AviAlliance, a private industrial airport investor and manager. The portfolio also included Tirana, but in April AviAlliance agreed to sell its participation in the Albanian airport to China Everbright for around $100 million.

“The management expertise is critical in terms of assessing how to improve efficiency,” Stewart continues. “Can you add more take-off and landing slots to the schedule to meet growing demand? How do you optimise the terminal, what services do you offer? These are all operational skills you wouldn’t expect an institutional investor to naturally have. The platforms and partnerships are a key part of our strategy.”


Another key part of PSP’s strategy is establishing a presence outside Canada. “As I mentioned before, we’ve had a tremendous period of growth. I pay tribute to what’s been accomplished in the past but now the challenge is to sustain that growth,” Stewart remarks.

While PSP is a global organisation in terms of its investments, until recently it was only physically present in Canada. Last November, the pension added a new outpost, by opening an office in New York. The New York team, which focuses on private debt, has already committed some C$3 billion within a few short months, according to Stewart.

PSP has also established a seven-member team in London and expects to almost double that by the end of the year. Its real estate group is in the process of building a permanent location, but the office is up and running. While the London office currently focuses only on private equity – Simon Marc, PSP managing director, private equity, Europe is expanding the team – ultimately it will be active in all the asset classes in which PSP invests. Patrick Charbonneau, one of the infrastructure group’s managing directors, will be relocating to London as early as this autumn.

“And we’ve already started to think about where we could locate in Asia,” he says. “We’ve recently been scouting locations and possible candidates to start our presence there.”

Establishing a local presence in various parts of the world raises the issue of talent. “Talent is critical; it’s the lifeblood of our organisation,” Stewart emphasises. “One of the distinctive characteristics, I think, of the Canadian model of pension fund investing, is that we’ve had the relative good fortune in our governance to think about how we evolve our compensation schemes to attract good talent. Of course, as we grow globally that becomes ever more important,” he observes.

Speaking of competition, the conversation turns to how PSP navigates an increasingly competitive environment for infrastructure assets and whether it tends to stay away from auction-type deals. “Not necessarily,” is Stewart’s response. “As a pension fund investment manager with direct investing skills, we sometimes have a cost of capital advantage, certainly vis-à-vis funds that have more expensive cost structures and investment targets. As I mentioned earlier, our strategy is to be agile and to be known for being able to deal with complex transactions.”

One way PSP stays ahead of the competition is by identifying and pursuing transactional opportunities that may be more difficult for others to access, relying on its well-developed investment process and experience.

“We talked about change and there’s change occurring in the sector that makes some investors nervous,” he notes. “We think we have the skills to deal with change thoughtfully and to assess whether there is an opportunity or not.” The second way PSP seeks to maintain a competitive edge is by diversifying across geographies.

While PSP’s core focus is and will continue to be developed markets, it has some exposure to emerging markets.

Part of that exposure comes from the road concessions in Brazil that are part of the Roadis portfolio. However, given the political and economic change Brazil is undergoing, the question of how PSP views that particular market inevitably comes up.

“I would say this,” Stewart replies. “Yes, it concerns us, but we are long-term investors and therefore we need to take a continuously disciplined approach in answering the question: ‘Is there a market opportunity?’”, he continues.

Markets may fall out of favour but they also bounce back. The important thing is knowing when that happens. Waiting until it is obvious is usually too late, according to Stewart.

“One has to have the courage of conviction at times to – again, in a very disciplined way – take a thoughtful approach to the market,” he says. “While things in Brazil aren’t rosy, and they will probably get worse before they get better, we think one of the country’s strengths is the judicial process. We’re seeing the judicial process bring to light many of the issues that need to be dealt with. We are therefore cautiously optimistic, and I emphasise the word cautiously, that things will get better,” Stewart remarks.


His optimism extends to the future of the Canadian market as well, a market that many large Canadian institutional investors lament does not offer the types of opportunities that allow for effective deployment of capital. But could the election of Justin Trudeau and his government lead to change?

“I think they have a very clearly stated objective. They’re talking about a very significant investment in infrastructure,” he says, referring to government plans to invest C$120 billion in the sector over the next decade.

“The finance minister Bill Morneau has publicly encouraged the cabinet to be thinking about recycling of assets, about privatisation and ways to free up public funds.”

“There’s been some political reticence about this,” he continues. “There’s always that concern, amongst the electorate, about paying fees to private institutions. But when you have such a pressing need, organisations like ourselves that are private with a social cause, I think the population will be very supportive of this.”

Time will tell whether this prediction will come to pass, but in the meantime PSP has many markets to explore and conquer beyond Canada’s borders.

“Internationally, we’re involved in over 30 countries,” Stewart says, and that’s in real assets alone. “It’s one of those things that always surprises Canadians, the international activities of our groups. We’re almost a best-kept secret in our own country.” Perhaps not any more.