PSP on partnering for pension fund success

Local partnerships are hugely important when identifying new assets in the natural resources space, allowing investors to better prioritize both their ESG goals and financial returns, says PSP Investments’ Marc Drouin.

This article is sponsored by PSP Investments. 

As one of Canada’s largest pension investment managers, the Public Sector Pension Investment Board (PSP Investments) has grown rapidly since its inception in 1999, with over C$200 billion ($156 billion; €147 billion) in assets under management. In addition to its team of international experts, PSP Investments owes its success to its commitment to its mandate, which it aims to achieve through a long-term focus on a diverse portfolio of asset classes.

PSP Investments focuses on responsible investing and incorporating ESG considerations into its investment decision-making. As such, Marc Drouin, senior managing director, real assets and global head of natural resources, at PSP Investments, believes that the opportunities his group explores not only hold the potential for significant returns; they can also support the transition to a global net-zero future that will benefit the entire planet.

Recently, PSP Investments was successful across several categories at this year’s Agri Investor Global Awards, including first place in both the Global Institutional Investor of the Year and Global Deal of the Year categories. The latter comes in recognition of the purchase of pioneering cotton producer Auscott by Australian Food & Fibre (AFF), a joint venture between PSP Investments and the Robinson family from New South Wales. Drouin spoke with Agri Investor about the acquisition, and what PSP Investments looks for when identifying new investments.

How has PSP Investments’ natural resources business developed over the years?

Marc Drouin

Our natural resources asset class was introduced by PSP Investments in 2011. At the time, management put together a cross-asset-class team of colleagues from private equity, real estate and infrastructure to bring a timberland property on board, understanding that this was an asset that was well aligned with our mandate. Ultimately the natural resources asset class was built around that cornerstone acquisition, with agriculture added to the remit as it was deemed to share many of the same attractive attributes of timberland investments (natural inflation hedge and low correlation with other asset classes).

We made our initial natural resources investment in a timber business located on the west coast of Canada, with the notion that we’d build a growth platform around it and acquire other opportunities in the Pacific Northwest.

However, after some unsuccessful searching, we found our way to New Zealand, where we made our second investment, also in timber. From there, we ultimately entered the Australian market, where we built our first major farmland platform, which was a joint venture with a local family-run farming business, and Australasia now makes up more than half of our natural resources portfolio.

Today, we have around 30 such joint ventures in agriculture, with most of our investments in either North America or Australasia, and with a smaller number in Latin America and the Iberian Peninsula. We want to invest in places where we can achieve scale in sectors with strong secular fundamentals, where there is a deep pool of potential like-minded local operating partners, where the rule of law prevails, and foreign investment is welcome. Our 30-plus platforms now produce a wide range of crops and products including timber, cereals, cotton, coffee, tree nuts, fresh produce, olives, wine grapes and animal proteins.

Of course, in the decade or so that we’ve been operating in the natural resources space, the markets for timber and agriculture have evolved significantly. For several years, following our second timber acquisition, for instance, we have had a particularly difficult time finding attractively priced timber assets.

Recently, however, we’ve been more successful, particularly in Latin America, where we added platforms in each of Brazil and Chile, and in the US, where we’ve deliberately made acquisitions that have more of a focus on carbon capture in addition to traditional timber harvesting. With timber being a particularly good carbon sink, and with climate change mitigation becoming more top of mind, we’re optimistic that more opportunities will present themselves.

What does PSP Investments look for when exploring new investment opportunities in the natural resources sector?

We place a big focus on finding the right local operating partners that share our vision and values, including in key areas of sustainability such as health and safety, community engagement and efficient use of resources. Sustainable farming practices have always been a focus for us and our partners – and are also naturally important for the communities where we operate.

We also look to invest in land that can produce crops that benefit from strong supply-demand fundamentals underpinned by attractive secular trends such as the growth of the middle class and the westernization of diets in emerging regions, the focus on healthy diets and the declining natural resources to meet such demand. Furthermore, we’re looking for either an attractive starting point with a clear path to significant scale or, ideally, a relatively large opportunity to start with.

Investment in complementary post-farmgate opportunities, such as logistics and the first layer of processing, is also increasingly a focus, where a relatively small amount of incremental capital can improve farm level margins, reduce volatility and allow our platforms to become more strategic suppliers to some larger customers rather than just sell undifferentiated commodities.

But ultimately, we’re real asset investors, so the core of our asset base is land, water and biological assets, and that’s going to be where the bulk of our capital is going to continue to be deployed.

What makes PSP Investments’ natural resources investment offering unique?

Some of the main ways in which we stand apart include our long-term investment horizon, which spans decades and allows us to invest through cycles; our in-house and cross-platform sector expertise across both the timber and agriculture spectrums; partnerships with best-in-class local operating partners who share our investment philosophy and are prepared to invest alongside us; and our ample liquidity to support the growth of our investee companies.

Furthermore, as owners and stewards of sensitive resources, we are fully aware of the responsibilities we have toward the communities in which we operate, including from an environmental footprint standpoint. In fact, we are currently in the process of conducting a review of our carbon footprint across our 3 million hectares of agriculture and timberland assets.

We are ultimately looking for ways to reduce our carbon footprint and increase the potential for our assets to serve as a carbon sink, which is well aligned with our recently launched Climate Strategy, whereby we commit to use our capital and influence to support the transition to global net-zero emissions by 2050.

Could you talk about the Auscott deal and the role local partnerships and local expertise played in it?

The Auscott acquisition is emblematic of our investment model – an investment-friendly jurisdiction, a sector with positive long-term fundamentals, a trusted top-tier local partner, high-quality assets of exceptional scale and significant post-farmgate capabilities.

We acquired Auscott, one of the leading cotton producers in Australia, through our AFF joint venture with the Robinson family, with whom we’ve been partners for about five years now. It’s been a hugely successful partnership, in large part because the Robinson family values are well aligned with ours – and they are also top-class operators.

When the opportunity came to acquire Auscott, it appeared to us as a natural fit for AFF. Auscott’s properties offered geographical diversification relative to AFF’s portfolio of farms and its significant post-farmgate capabilities were highly complementary to our JV. Our long-term horizon, combined with the Robinson family’s multi-decade experience, allowed us to see beyond the dry conditions that prevailed in Australia at the time of the transaction.

Finally, well before the Auscott deal, we had deployed hundreds of millions of dollars with AFF on other acquisitions; hence our confidence in the company’s ability to integrate this new operation.

Sustainability or ESG considerations are important when looking at climate-oriented investments, but so too are returns. How does PSP Investments balance these factors and are they ever in conflict?

We look at all private investments – not just climate-oriented investments – through an ESG lens. This is a key part of our approach to responsible investing. We always return to our business mandate, which is to achieve a maximum rate of return, without undue risk of loss. However, we wouldn’t pursue an investment if there was no clear path to achieving strong ESG credentials. Fortunately, we believe these factors are aligned. We find that the management teams that have good track records on ESG tend to be top performers.

With our natural resources group, we’re focused on the agriculture and timber sectors, which are particularly at risk from climate change. So, climate and sustainability considerations are a logical part of the risks we’re mitigating against. We think this is conducive to good returns in the long term.

What do you think the future holds for natural resource investment and how does this relate to PSP Investments’ ambitions?

I’m hugely optimistic about the future for natural resource investment. From a portfolio construction standpoint for PSP Investments, natural resources play a very important role because of both the embedded inflation hedge they provide and their lack of correlation with our other asset classes. Their performance in times of crisis also gives me cause for optimism – and we’ve seen this consistently. If you look back at agriculture over decades, it generally performs well when times are tough. We’ve seen this throughout the history of our own investments too, particularly during times of geopolitical and global economic uncertainty, such as the pandemic.

We’re going to continue to deploy capital as PSP Investments grows. Hence, even if our allocation to natural resources remains stable, we’ll need to continue to increase our deployment. A big feature of our growth so far has been adding platforms. But we can’t continue to grow at the same pace in this way, so I see us improving scale with our existing platforms.

I think we’ll continue to see an acceleration of our initiatives around sustainability, given the focus on the decarbonization of the global economy. I believe this is going to be significantly positive for us in the way we approach our investments.

PSP Investments’ pilot program with Leading Harvest

PSP Investments’ Natural Resources Group is part of a pilot program in Australia with Leading Harvest, a non-profit organization focusing on sustainable agriculture that aims to standardize sustainability verification and reporting. The organization’s “Farmland Management Standard” hopes to reduce inefficiencies faced by farmers, producers and customers by providing the sustainability assurances demanded by the market.

In Australia, the Leading Harvest pilot program includes participants holding more than 1 million acres, including PSP Investments and several other major agriculture investors. Together, Leading Harvest and the program participants will establish a Farmland Management Standard that is tailored to Australia and reflects the agronomic, regulatory and operating realities of the country.