PSP Investments: Natural capital perfect match for pension funds

Since its foundation in 1999, The Public Sector Pension Investment Board (PSP Investments) has become one of Canada’s largest pension investment managers. It invests funds for the pension plans of the Public Service (Canada’s civil service), the Canadian Armed Forces, the Royal Canadian Mounted Police and the Reserve Force (Canada’s part-time backup armed forces). 

PSP manages a diversified global portfolio worth some C$265bn (€181bn), of which natural resources – which encompasses timber, agriculture and ‘related opportunities’ – represent C$15.2bn in net assets (rising to C$23.1bn in gross assets under management). 

In explaining the investment case, Marc Drouin, senior managing director of real assets and global head of natural resources investments, is very clear in the justification for natural capital. “Natural resources investments – principally agriculture and timberland – have very attractive attributes for pension investors. Given their high component of land, water and biological assets, they offer strong downside protection, a material hedge against inflation and low correlation to other asset classes in the PSP Investments portfolio.”

In the past five years, the investor’s natural resources investments have returned 7% per annum.

Geographically, only 11.3% of the portfolio is invested in Canada (see table). By far the biggest geographic concentration is in Oceania – 43.9%, followed by 25.5% in the US. In terms of sectors, permanent crops represent some 41.4% of investments and row crops 20.4%. Timber is 23.1%.

Natural resources investments “typically have two common characteristics”, according to Drouin.  Firstly, “we focus on real assets in agriculture and timber in investment-friendly jurisdictions around the world where the rule of law prevails” and secondly, “we partner with best-in-class local operators”.

When it comes to evaluating potential partners, Drouin says PSP Investments is “looking for high-performing and like-minded local operators who share our long-term investment philosophy and commitment to sustainable practices, employee health and safety, responsible stewardship of natural resources and positive community contribution.”

PSP Investments pursues investments with a high component of land, water and biological assets, with the opportunity for low cost of production, including through scale. “We favour commodities and sectors that will benefit from secular trends, including strong demand growth and constrained supply,” says Drouin. “We have a preference for businesses with access to both the domestic and export channels and that are well suited for complementary ‘post-farmgate’ vertical integration.”

An examination of some of the key investments illustrates these criteria – and the preference for Oceania. Kaingaroa Timberlands, for example, is one of the largest contiguous softwood plantations in the southern hemisphere, located in the Central North Island of New Zealand. PSP Investments first invested in the business in 2013 and has partnered alongside the New Zealand Superannuation Fund and Kakano, a limited partnership representing a collective of the Central North Island iwi (or Māori tribes).

“Kaingaroa Timberlands is a premium asset with the lowest cost structure in the country,” says Drouin. “It has internationally recognised sustainability certifications, such as the Forest Stewardship Council, with a stated focus on safety, increasing biodiversity and positively contributing to local communities.”

Meanwhile, Hewitt was PSP Investments’ first agricultural platform in Australasia in 2015. PSP is in partnership with the Hewitt family in one of the first institution/family agriculture partnerships of scale in Australia.

The company has grown the business through properties aggregation and vertical integration – it now has more than 200,000 livestock across 2.2m hectares. Drouin says: “Today, with assets in Australia and the US, Hewitt is a global leader in organic beef, vertically integrated across livestock raising, processing, marketing and distribution.”

Similarly, Australian Food and Fibre (AFF) is a partnership launched seven years ago between PSP Investments and the Robinson family with a focus on cotton production. Since then, as with Hewitt, the AFF partners have grown the business through the aggregation of properties while also developing major post-farmgate capabilities in cotton processing, logistics and marketing.

“AFF is a leader in Australian cotton growing and processing. It has a clear commitment to sustainability, with certification from Leading Harvest and Regen Ag,” says Drouin.

“Natural resources investments can have exceptionally long investment horizons, measured in decades not years,” says Drouin, looking to the future. “It can involve long down cycles [where] access to capital from a well-resourced partner such as PSP Investments and low cost of production are critical.”

There are challenges, however. “It goes without saying that all agricultural businesses need to build resiliency to manage more pronounced weather volatility,” he says. “Across the natural resources portfolio, we are actively supporting the development of transition plans and the achievement of sustainability certifications.”

Given the global nature of the markets for the commodities produced by PSP investments, they “also monitor for potential challenges related to trade action around the world”.