PUBLIC SECTOR PENSION INVESTMENT BOARD 2017 ANNUAL REPORT

IN
VEST
ING
FOR PEACE OF MIND
IN LONG-TERM PARTNERSHIPS
IN GIVING BACK
AS ONE PSP
IN OUR GLOBAL FOOTPRINT
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IN VEST ING is the very core of our vision, our mandate and our business

Our vision

Our vision is to be a leading global institutional investor that reliably delivers on its risk-return objective by focusing on a total fund perspective and always acting in the best interests of our Canadian sponsor, and pension plan contributors and beneficiaries. As we pursue a larger global footprint, we will leverage our talent to deliver agile and efficient execution at scale, and become a sought-after enabler of complex global investments.

The courage of our convictions

André Bourbonnais

This is a truly
exciting time for
PSP Investments.
We are in a state of
accelerated evolution.

Thanks to a clear vision and well-thought-out plan, our employees carried out a broad range of strategic initiatives – with contributors and beneficiaries at the heart of everything we do.

For fiscal year 2017, our net portfolio return was 12.8%. We delivered a five-year net annualized return of 10.6%, exceeding our policy benchmark, and exceeded our long-term return objective by delivering a net annualized return of 6.0% on a 10-year basis. We also reached $135.6 billion of net AUM, and expect to manage $200 billion by 2025.

The entire organization worked as one to advance the five strategic axes of our Vision 2021 plan:

Cultivate One PSP: We created total fund portfolios to pursue opportunities that benefit overall performance.

Improve our brand locally and internationally: We made significant strides in defining our identity and increasing our visibility to support our growth. We also evolved our internal communications approach to foster increased openness, dialogue and transparency.

Increase our global footprint: We completed the NY office hiring plan and opened our London–based European hub, with top-tier teams in Private Equity, Private Debt, Real Estate and Infrastructure. We plan to follow this up with an office in Asia.

Increase scalability and efficiency: We introduced a Global Equity Investment and Research Platform to optimize knowledge sharing and risk management.

Develop our talent: We focused on our new talent attraction and retention strategy, and reviewed our compensation plan. In fiscal year 2018, we will implement a new compensation plan to encourage accountability and better align individual and organizational performance.

The changes we implemented are empowering our people to embrace our mission and fulfill our shared purpose: to contribute to the financial security of the contributors and beneficiaries who have served Canada.

I would like to thank our employees for their hard work and commitment; the senior management team for steering our strategic direction; and the Board of Directors for the confidence they place in us, and the oversight and guidance they provide.

André Bourbonnais President and Chief Executive Officer

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12.8%

Total NET
portfolio return

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10.6%

Five-year NET
annualized return

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6.0%

10-year NET
annualized return

$13.7

Billion*

of cumulative net investment gains above the return objective over 10 years

$57.5

Billion

of cumulative 10-year net investment income

$17.8

Billion

in new investments and commitments to private markets and private debt in fiscal year 2017

$13.7

Billion*

of cumulative net investment gains above the return objective over 10 years

$57.5

Billion

of cumulative 10-year net investment income

$17.8

Billion

in new investments and commitments to private markets and private debt in fiscal year 2017

* Based on market value of assets as at March 31, 2017, taking into account timing and size of contributions.

$135.6

Billion
net assets

16.1%

increase
in net assets

$3.6

Billion
net contributions

net assets per pension
plan account ($ billion)

As at March 31, 2017

$26.7

19.7%
Canadian
Forces

$9.8

7.3%
RCMP

$0.6

0.4%
Reserve Force

$98.5

72.6%
Public
service

Asset mix

As at March 31, 2017

26.1%

Real
Assets

18.2%

Government
Fixed Income1

3.3%

Credit

52.4%

Equity

1 Includes cash and cash equivalents.
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Nathalie Bernier Senior Vice President,
Strategic and Business Planning
and Chief Financial Officer

AT PSP INVESTMENTS, DEVELOPING THE RIGHT
PARTNERSHIPS IS A TOP PRIORITY.

Giulia Cirillo Senior Vice President
and Chief Human Resources Officer

DEVELOPING A GLOBAL FOOTPRINT IS A CORE
COMPONENT OF PSP Investments’ 5-YEAR STRATEGY. IT CREATES
EXCELLENT OPPORTUNITIES FOR OUR PEOPLE.

IN VEST ING

For
peace
of mind

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IN VEST ING

For
peace
of mind

J. R. Gallant

Lieutenant (Navy), Executive Officer
Fleet Diving Unit (Atlantic)

LIEUTENANT GALLANT CAN LOOK TO THE FUTURE WITH CONFIDENCE

We invest with the shared purpose of generating benefits for pension plan contributors and beneficiaries

“When I think about retirement, investing and security are synonymous; they’re both about putting the right actions in place now to ensure peace of mind in the future.”

J. R. Gallant

Lieutenant (Navy), Executive Officer
Fleet Diving Unit (Atlantic)

As an Executive Officer for the Royal Canadian Navy’s Fleet Diving Unit, I take pride in ensuring that the 110 people I work with have everything they need to be safe and successful. As they move up through the ranks and take on more responsibility, my focus will always be on making sure they are well equipped to handle as many different situations as possible.

With my family, it’s the same thing: I need to make sure that they are taken care of at all times, whether I’m at home or deployed abroad. I want my children to get off to a great start and to have access to the right kind of education and opportunities.

For me, investing is also about exploiting different opportunities to ensure that I won’t need to worry about money in the future, and that I can pursue the things I’m passionate about.

Knowing that the professionals at PSP Investments are managing assets set aside by the Government of Canada for my retirement contributes to my peace of mind and will allow me to shift my focus from my fleet to my family with confidence.

My pension will allow me to forget about my paycheques, and focus on pleasure: a volunteer commitment to coaching football, which I plan on pursuing well into retirement.

IN
LONG-TERM
PARTNERSHIPS

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IN VEST ING

IN
LONG-TERM
PARTNERSHIPS

Jay Alix

Founder, AlixPartners

Guthrie Stewart

Senior Vice President and Global Head of Private Investments
PSP Investments

PSP INVESTMENTS AND ALIXPARTNERS

Building a solid partnership based on a shared vision for long-term growth

“Investing is about more than providing capital; it’s an opportunity to build mutually beneficial relationships that can create long-term value. PSP Investments and AlixPartners are building a relationship that will generate wide-ranging benefits for years to come.”

Jay Alix

Founder, AlixPartners

Guthrie Stewart

Senior Vice President and Global Head of Private Investments
PSP Investments

At AlixPartners, our business is to support companies around the world with advisory services when it really matters. When it really mattered for us, PSP Investments, together with other partners, helped our firm acquire long-term capital and supporters for the future growth of AlixPartners.

Since then, we are developing an enviable relationship. PSP Investments has rapidly become a trusted business partner providing valuable input and judgement on strategy, leadership and finance. Together, we collaborate on new ideas in line with our common vision for long-term growth, we share knowledge on a wide breadth of industries, and we offer help in evaluating investment opportunities.

This burgeoning partnership has allowed AlixPartners to aim its sights on a longer horizon, where our goals are focused on building value through growing our company. If PSP Investments isn’t already on the short list for an organization seeking long-term growth capital and a true business partner, it should be.

In
giving
back

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IN VEST ING

In
giving
back

Karine Dion

Senior Director, Business Planning
PSP Investments

KARINE AND HER TEAMMATES GIVE BACK

They are among the more than 460 employees who have taken part in PSP Gives Back since the program’s launch in 2016

“When we added up all the work we did at Welcome Hall Mission that day, and the positivity that came from our experience, it exceeded all of our expectations. It reminded us of the importance of giving back.”

Karine Dion

Senior Director, Business Planning
PSP Investments

Each year, the PSP Gives Back program offers us the opportunity to do two days of fully-paid volunteer work in our community. It is a concrete example of how our culture of collaboration empowers and enables us to make a difference.

I believe that, as individuals, the most precious thing we can do is invest our time. For some helping out at Welcome Hall Mission that day, it was their first time volunteering. We were there to lend a hand at their food bank that distributes more than 850,000 kg of groceries each year.

For us, the big payoff was knowing that we were working together and making a solid contribution to the community. In this context, the benefits of our collaboration were even more obvious than at work. Every minute we spent there made a difference in someone’s life. It motivated us to work with energy and enthusiasm.

In exchange for the hours we invested, we each got so much more out of the experience than we expected. We could see that our efforts were improving the lives of others and it inspired us to contribute even more in the future. This is what I believe fuels PSP Gives Back.

As
one
PSP

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As
one
PSP

Tatiana Lewin

Director, Legal Affairs
PSP Investments

TATIANA IS PART OF A GLOBAL TEAM

She plays an integral role in investment deal teams

“Everyone at PSP Investments has a role to play in executing the investment strategy – whether in business or investment roles. For me, investing means putting money to work as part of a smart and well thought out plan with the collaboration of some of the best in the business.”

Tatiana Lewin

Director, Legal Affairs
PSP Investments

PSP Investments’ reputation precedes us; our agility and our ability to enable complex global investments mean that we are always working on innovative solutions with our business partners. This leads to lots of opportunities for us to provide input on exciting projects.

As part of the Legal Affairs team, I support negotiations by getting a solid understanding of the investment’s intricacies and by preparing contracts that ensure deals are right for all parties involved. I take pride in working with asset class teams in all of our offices to materialize the global investment plan.

Our culture fosters an atmosphere of collaboration and teamwork. We are all continuously raising the bar on the work we do, and we feel empowered in our roles because they are recognized as essential to PSP Investments’ success.

I’m proud to play an active role in PSP Investments’ international growth strategy. I can see first-hand the importance of collaboration between offices, and the opportunities available when connecting strategists from the investment teams to our professionals specialized in Human Resources, Communications, Legal Affairs and Taxation, as well as many others, to facilitate hundreds of deals every year.

In our
global
footprint

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In our
global
footprint

Patrick Charbonneau

Managing Director,
Infrastructure Investments (Europe)

PSP Investments

PATRICK LEADS THE EXPANSION OF OUR INFRASTRUCTURE TEAM IN LONDON

A rewarding challenge for him and PSP Investments

“Having an office in London is a game changer. Thanks to our local presence, we are gaining a better understanding of the global environment, we are strengthening our current partnerships and we are developing new investment opportunities and partnerships. I am humbled by the trust placed in me to expand our team in the world’s largest infrastructure investment market.”

Patrick Charbonneau

Managing Director,
Infrastructure Investments (Europe)

PSP Investments

PSP Investments puts talent, experience and empowerment to work. We are given responsibility to lead change within the organization, to influence the strategy and to constantly make decisions that have significant impact on the organization’s success. This is how we grow as professionals.

When I first started at PSP Investments as a young professional, I was given real opportunities to contribute to important projects. Being given responsibility showed me that senior management trusted me, which drove me to deliver the best possible results.

Ten years later, moving to London to expand the infrastructure team was exactly the type of professional challenge I wanted to take on. I am humbled by the trust PSP Investments is placing in me, and proud of our results so far.

Our office in London also seeds opportunities for cultural exchange throughout our entire organization. Not only have we been able to recruit top talent in leading professionals who are an amazing fit with PSP Investments’ culture, but the rich diversity they bring to the table is invaluable as our organization grows its global footprint.

Financial Highlights ASSET CLASSES

public markets1

Public Markets is composed of public market equities and government fixed income. Investments are managed by both internal and external managers using a combination of active, absolute and index-replication strategies. Public Markets delivers benchmark performance within policy portfolio guidelines, adds value through active management within risk limits and accounts for as much as 60% of assets under management.

1 Includes public market equities and government fixed income.

$77.2

Billion
net assets

56.9%

of total
Net assets

16.0%

one-year
rate
of return

10.9%

five-year
annualized
return

Financial Highlights ASSET CLASSES

real estate

Real Estate favours direct ownership and co-ownership through joint ventures with operating partners that are aligned to create value and generate returns. The group relies on strong in-house capabilities, local business relationships and select specialized funds in order to access specific investment strategies, with a primary focus on urbanization, demographics and technological innovation and adoption.

$20.6

Billion
net assets

15.2%

of total
Net assets

10.8%

one-year
rate
of return

12.3%

five-year
annualized
return

Geographic Diversification As at March 31, 2017

  • US 42.7%
  • Canada 20.7%
  • Western Europe 20.1%
  • Emerging countries 9.0%
  • Australasia 7.5%

DIVERSIFICATION BY SECTOR As at March 31, 2017

  • Office 29.2%
  • Residential/Retirement 29.1%
  • Industrial 16.2%
  • Retail 15.0%
  • Other 5.0%
  • RE Debt 3.2%
  • Health care 2.3%

Financial Highlights ASSET CLASSES

PRIVATE EQUITY

Private Equity strategically builds relationships with external fund managers and investment partners, leveraging their networks, and sector and geographic expertise to source long-term direct investment and co-investment opportunities. Private Equity is focused on creating value, generating long-term returns and providing positive elements of diversification to PSP Investments’ total fund portfolio. It continues to expand its global footprint to identify and respond to deployment opportunities.

$15.9

Billion
net assets

11.7%

of total
Net assets

(3.4)%

one-year
rate
of return

7.8%

five-year
annualized
return

Geographic Diversification As at March 31, 2017

  • US 48.1%
  • Emerging markets 20.5%
  • Europe 20.3%
  • Canada 9.0%
  • Asia 2.1%

DIVERSIFICATION BY SECTOR As at March 31, 2017

  • Financials 20.5%
  • Consumer discretionary 18.6%
  • Communications 13.5%
  • Industrials 11.7%
  • Technology 10.9%
  • Health care 9.9%
  • Consumer staples 6.2%
  • Other 5.6%
  • Energy 3.1%

Financial Highlights ASSET CLASSES

INFRASTRUCTURE

Infrastructure invests globally on a long-term basis, primarily in the transportation, power generation, telecommunications and public utilities sectors. The group is focused on direct investments, including platforms and co-investments.

$11.1

Billion
net assets

8.2%

of total
Net assets

14.4%

one-year
rate
of return

11.7%

five-year
annualized
return

Geographic Diversification As at March 31, 2017

  • Europe 47.1%
  • US 22.9%
  • Emerging markets 21.2%
  • Canada 5.4%
  • Australia 3.4%

DIVERSIFICATION BY SECTOR As at March 31, 2017

  • Industrials 46.9%
  • Utilities 39.6%
  • Communications 8.0%
  • Energy 4.8%
  • Other 0.7%

Financial Highlights ASSET CLASSES

natural resources

Natural Resources invests primarily in real assets and other opportunities in timber and agriculture. These sectors are well suited to the pension liability profile of the public sector pension plans for which PSP Investments is managing assets. Natural Resources will continue to prioritize sizable, direct, long-term investments and building scale with like-minded partners. The group believes our partnerships with a growing number of best-in-class, local operators provides us with meaningful comparative advantages.

$3.7

Billion
net assets

2.7%

of total
Net assets

19.5%

one-year
rate
of return

14.1%

five-year
annualized
return

Geographic Diversification As at March 31, 2017

  • Australasia 59.2%
  • North America 35.2%
  • Other 5.6%

DIVERSIFICATION BY SECTOR As at March 31, 2017

  • Timber 60.9%
  • Agriculture 28.1%
  • Oil and gas 11.0%

Financial Highlights ASSET CLASSES

PRIVATE DEBT

Private Debt focuses on direct non-investment grade primary and secondary credit investments in North America and Europe. Our team has the ability to commit to large positions and different portions of the debt capital structure in both loan and bond form. We balance credit quality, structure, deployment opportunity, risk-return profile, asset mix and portfolio diversification, among other considerations.

$4.4

Billion
net assets

3.3%

of total
Net assets

27.5%

one-year
rate
of return

23.2%

SINCE INCEPTION
ANNUALIZED RETURN
(1.3 years)

Geographic Diversification As at March 31, 2017

  • US 92.0%
  • Europe 8.0%

Product split As at March 31, 2017

  • First Lien 45.3%
  • Non First Lien 54.7%

DIVERSIFICATION BY SECTOR As at March 31, 2017

  • Consumer discretionary 28.2%
  • Technology 26.5%
  • Health care 15.8%
  • Industrials 12.1%
  • Financials 6.9%
  • Materials 6.6%
  • Communications 2.2%
  • Consumer staples 1.7%

SENIOR MANAGEMENT AND OFFICERS

André Bourbonnais

President and Chief Executive Officer

Daniel Garant

Has taken on new challenges outside PSP

Nathalie Bernier

Senior Vice President,
Strategic and Business Planning and Chief Financial Officer

David J. Scudellari

Senior Vice President,
Head of Principal Debt
and Credit Investments

Giulia Cirillo

Senior Vice President
and Chief Human Resources Officer

J.-F. Bureau

Senior Vice President
and Chief Risk Officer

Alison Breen

Vice President, Corporate Secretary
and Chief Regulatory Officer

Guthrie Stewart

Senior Vice President
and Global Head of Private Investments

Anik Lanthier

Senior Vice President, Public Markets
and Absolute Return Strategies

Darren Baccus

Senior Vice President
and Chief Legal Officer

Neil Cunningham

Senior Vice President,
Global Head of Real Estate
and Natural Resources

Alain Deschênes

Senior Vice President
and Chief Operations Officer