Think Look Move Forward

Public Sector Pension Investment Board

— 2018 Annual Report

Andrée-Anne Gagné, Analyst in Investment Finance and Olivier Ouellet, Director in Benefits & Wellness

At PSP Investments, we highlight the possible.

We explore every angle—across asset classes, markets and industries—to broaden our perspectives.

We work as one, recognizing that diversity is an asset that can help us realize the full potential of our ambitions.

Our tight collaboration has allowed us to develop a collective instinct for honing in on opportunities that would otherwise be overlooked, unnoticed, and unseen.

In blind spots or in plain sight, we always seek to spot the edge.

Think. Look.
Move forward.

Neil Cunningham

President and Chief Executive Officer

I am incredibly proud of our accomplishments and of our collaborative and innovative culture.

Time and time again, our employees went above and beyond in demonstrating their commitment to our shared purpose: to contribute to the financial security of the contributors and beneficiaries who have served Canada in their careers.

For the year ending March 31, 2018, our portfolio return was 9.8% net of all costs. We delivered a net return of 10.5% on a five-year basis, exceeding our policy benchmark of 9.4% by 1.1%; and we exceeded our return objective by delivering a net return of 7.1% on a 10-year basis. We also reached $153.1 billion of net assets under management at fiscal year-end, and expect to manage $200 billion by 2025.

Our people worked collaboratively on the advancement of the five axes of our Vision 2021 Strategic Plan:

— Cultivate One PSP

We expanded our global research capability and improved processes to leverage our powerful global networks across multiple geographic sectors and asset classes.

— Improve our brand locally and internationally

We launched our new branding, Edge, which defines our ability to spot the unique advantage in everything we do. We also received an important accolade by being named one of Montréal’s Top Employers.

— Increase our global footprint

We continued to expand our investment activities throughout the Americas, Europe and Asia.

— Increase scalability and efficiency

We made considerable deployments, closing numerous investments, securing many new commitments and launching new internal systems to support operational efficiency.

— Develop our talent

We finalized the complete revamp of our talent acquisition strategy, held our first campus information sessions and expanded the internship program.

We also launched our Inclusion & Diversity (I&D) Forum and initiated an I&D Council, which I co-chair.

Thank you
I would like to thank each of our employees for their incredible work ethic and for fully supporting the numerous initiatives that Vision 2021 requires of them. I would also like to thank Martin J. Glynn and the entire Board of Directors for their invaluable insight and guidance.

Neil Cunninham
President and
Chief Executive Officer

Financial highlights

Fiscal year 2018

9.8%

Total fund one-year net
portfolio return

10.5%

5-year net
annualized return

7.1%

10-year net
annualized return

$23.8

Billion

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

$71.6

Billion

of cumulative 10-year net investment income

$20.1

Billion

in new investments and commitments to Private Markets and Private Debt

$153.0

Billion
Net assets

$3.9

Billion
Net contributions

12.9%

Increase
in net assets

Net assets per pension plan account

As at March 31, 2018

$ billion

$111.1

72.6%

Public Service

$30.1

19.7%

Canadian
Forces

$11.1

7.3%

RCMP

$0.7

0.4%

Reserve Force

Asset mix

As at March 31, 2018

1 Includes cash and cash equivalents.

46.5%

Equity

28.2%

Real assets

18.1%

Government
Fixed Income1

5.8%

Credit

1.4%

Complementary Portfolio

Washington, D.C.’s
The Wharf

CeramTec

Air Medical
Group Holdings

Blueshift Asset
Management

Australian
Food & Fibre

Pattern Energy

Asset classes

— Financial highlights 2018

% of total net assets.
Total net assets exclude cash
and cash equivalents.

1 Includes public market equities and government fixed income.

People forward

Our people are passionate about what they do, and work as a team to achieve superior results. They find opportunities in challenges and inspire each other to be authentic, and to learn and share knowledge.

 The making of
a destination.

Real Estate

Washington, D.C.’s
The Wharf

City living is changing. The increased densification of urban cores in global gateway cities is leading to a rise in consumer spending on experiences, including food and beverage, entertainment, culture, education and travel. With this fresh perspective in mind, our Real Estate team recognized a compelling opportunity in the transformation of the Wharf in Washington, D.C., into a vibrant mixed-use development.

“We saw the potential as soon as we were presented the project,” said Kris Wojtecki, Managing Director, Real Estate Investments. “It would be the first site of its kind on a waterfront property in the US capital. After we reviewed the plans, getting to know the partner clinched the deal.”

Our team was also inspired to go ahead by the LEED Gold certified design. For city leaders, the project ticked three key boxes in urban development: affordable housing, high-quality jobs and a potential tax base increase.

PSP made it possible to convert the Wharf into a vibrant destination. The Wharf provides a unique living experience with condos, apartments, shopping, dining, entertainment, piers, boat slips and a boardwalk. It’s a place where diverse people can live, congregate and have fun.

“A project of this scale in a prestigious world capital was groundbreaking, not just for PSP but for the entire real estate world,” added Kris. “Mixed-use real estate development is on the rise. With this project under our belt, PSP can play a big part in shaping the future of the real estate industry.”

The grand opening of Phase 1 took place in the fall of 2017, with the support of Washington D.C.’s city council members and D.C.’s representative in Congress. Celebrations included fireworks, music and entertainment events, topped off by a Foo Fighters’ concert. Phase 2 is currently in pre-development.

Highlights

US$2.5 billion investment

Total of 297,300 square metres

1,375 residences and 4 hotels (800 rooms)

87,800 square metres Class A office space

4 hectares of parks, open spaces and civic areas

400 trees planted on the site

4 public-use piers and 400 boat slips

From left to right George Fortin, Manager and Loren Shore, Director, Real Estate Investments

 A really “hip
investment.

Private Equity

CeramTec

Ceramics have been part of human life for millennia and today, are increasingly improving people’s quality of life – notably through hip replacement procedures. To capitalize on the potential of this growing market, PSP acquired CeramTec, the world’s leading manufacturer of high-performance ceramics, in partnership with BC Partners and Ontario Teachers’ Pension Plan.

“Total hip replacement (THR) has been around since the 1960s and can be truly life-changing,” said Przemek Obloj, Managing Director, Private Equity (Europe). “In leading hospitals, it takes less than an hour and gives people their mobility back within weeks. With people staying active longer, THR is often essential for maintaining their quality of life.”

While metal components have historically accounted for the majority of hip replacements, ceramics are rapidly taking over as a biocompatible, high-performance alternative to metals. CeramTec is the clear leader in this segment, selling 1.5 million hip implant components to world-leading hip implant system manufacturers in 2017. We estimate that CeramTec’s components are used in nearly one out of two hip replacements worldwide. Always on the lookout for those rare businesses with strong fundamentals and long-term growth potential, we partnered with private equity firm BC Partners very early in the sale process.

“We knew it would be a competitive auction, so our consortium completed extensive work ahead of the process and put forward a binding offer two weeks before the deadline,” said Przemek. “Being prepared and decisive enabled us to become part of CeramTec’s exciting next chapter of growth.”

Highlights

Founded in Germany in 1903 as a porcelain manufacturer

Over 10,000 different products used in medical technology, automotive, electronics, energy and environmental technology, and mechanical engineering

More than 3,400 employees worldwide

20 facilities in Europe, America and Asia

From left to right Pedram Shayegan, Manager, Tolga Sengel, Director and Przemek Obloj, Managing Director, from the Private Equity team in Europe

 David Morin, Senior Director, Private Equity

 Highlighting
the possible.

Private Debt

Air Medical
Group Holdings

When the world’s largest air ambulance provider wants to buy the largest provider of ground ambulance in the US, it involves complexity and many different players to complete the acquisition. There’s also tremendous potential – for synergy between the two businesses and for growth as populations age and hospitals and municipalities outsource non-core services.

For our Private Debt team in the US, it was exactly the type of transaction they wanted to invest in. “Through our relationship with KKR, the owner of Air Medical Group Holdings, we were brought in to find a creative financing solution that worked with their existing capital structure and provided KKR the flexibility they desired,” said Jeff Rowbottom, Managing Director, Private Debt. “While the merits of the merger were clear to us, our investment team still needed to complete our due diligence in a responsible manner within a tight timeline.”

We believe that PSP’s edge helped us secure an attractive investment – given both the size and breadth of different debt instruments that we can offer and the reliability of our execution capabilities. We pride ourselves on being agile, creative and collaborative within our team and with our partners.

The final debt tranche that PSP led was a customized US$730 million unsecured term loan – an instrument that is rarely seen in the leveraged loan market. With Private Debt’s help, KKR was able to combine these two important companies. We are gratified that patients and their families will benefit from Air Medical Group Holdings’ expansion of their capabilities in the invaluable emergency transportation services they provide.

Highlights

Largest provider of emergency and non-emergency ground transportation services in the US

Over 5 million patients annually

Fleet of more than 7,000 vehicles in 42 states

Largest independent provider of emergency air medical services in the world

Over 83,000 transports annually, fleet of more than 320 medically-equipped helicopters and fixed wing aircraft in 33 states

The combined company employs more than 34,000 professionals

From left to right Jeff Rowbottom, Managing Director, Alyssa Roland, Manager and Chip Mahoney, Director, from the Private Debt team in New York

 Investing
outside 
the box.

Public Markets

Blueshift Asset
Management

There’s one thing that distinguishes our Public Markets group – the team is always trying to think outside the box when it comes to investments, structures, fees and external partnerships.

This is how Blueshift Asset Management was discovered. In 2017, PSP struck a deal with this new partner, an emerging hedge fund manager introduced to us through our partner network. Blueshift had developed a proprietary approach to embed high-frequency trading and order flow insights, as well as big data analytics, into a statistical arbitrage strategy.

Not your run-of-the-mill strategy, statistical arbitrage uses highly sophisticated computer models to take advantage of fleeting opportunities in equity markets.

“Statistical arbitrage funds managed by teams with good pedigrees and strong track records are typically closed or too expensive,” said Timour Zilberchteine, Director, External Manager Search and Monitoring. “You have to look far and wide to find a proven partner with differentiated intellectual property.”

That’s where Blueshift came in. The firm emerged from the spinout of the asset management arm of a larger financial and technology company and was seeking a long-term strategic partner.

“By investing in Blueshift, we now have a strong relationship with a team that has deep expertise in high-frequency trading, possesses a sophisticated trading infrastructure and shares common values with PSP. We were able to negotiate mutually favourable terms that will help Blueshift to build its business and help PSP to secure capacity in a highly sought-after strategy.”

Highlights

Pioneered trading style combining insights from market-making and statistical arbitrage signals

Quantitative and quantamental investment process

Average trades per minute: over 500

Data records processed daily: ~ 2 billion

Diverse portfolio: 2,400 positions on average

Boston-based research centre

Co-location at 12 stock exchanges

From left to right Simon Fournier, Managing Director, and Timour Zilberchteine, Director, External Manager Search and Monitoring, Public Markets and Absolute Return Strategies

 Corey Dean, Business Analyst, Blueshift Asset Management

From left to rightJoe Robinson, Chief Executive Officer, AFF, with Jon Carter and Steve Porter

 Thinking
alike
and
seeing afar.

Natural Resources

Australian
Food & Fibre

Over the years, the Robinson family built their agriculture business, Australian Food & Fibre (AFF), into a world-class Australian cotton producer with highly efficient and proven expertise in sustainable land development and water management.

“Long before we’d met them, the team had heard great things about both AFF and the Robinsons through our existing network of partners in the country,” said Marc Drouin, Managing Director and Head of Natural Resources. “So when the opportunity to partner with them came along, we jumped at it.”

“Intrigued by the Natural Resources group’s first Australian joint venture with the Hewitt family, the Robinsons saw in PSP a potential like-minded partner who could help AFF continue to grow at a healthy pace without jeopardizing the long-term future of the business.”

AFF and PSP ultimately signed a long-term joint venture agreement that gives AFF capital to fund acquisitions and other capital projects, while also unlocking access to PSP’s global network of agriculture partners, who all share a strong focus on and commitment to employee health and safety, and the environment. Meanwhile, PSP benefits from having direct ownership in yet another, forward-thinking joint venture operating in a stable, farming- and investor-friendly country, and well poised to seize opportunities.

Concurrent with the execution of our joint venture agreement, together we completed our first joint acquisition by purchasing Koramba, one of the county’s largest contiguous cotton farms. AFF has also since invested in a sophisticated new health and safety reporting system and in projects aimed at improving its farms’ resilience to climate events, while reducing its use of pesticides to below industry peers.

Highlights

Among the top 10 producers of cotton in Australia

8 farms (5 owned / 3 leased)

Approximately 32,000 hectares of land under management

Total production in 2017
25 million kilograms of cotton
40 million kilograms of cereals

85 employees

From left to right Marc Drouin, Managing Director and Head of Natural Resources, Ricardo Eusebi, Director, Christina Tannous, Director, Portfolio Management and Operations and Dinos Papoulias, Associate

From left to right Yannick Beaudoin, Managing Director, Irene Xue, Associate and Alienor Armand, Manager, Natural Resources

 Vision makes
visionaries.

Infrastructure

Pattern Energy

By now, most people have seen the effects of climate change on our world and come to realize that we need to do things differently to sustain our future.

Our Infrastructure group drew this same conclusion more than a decade ago and zeroed in on opportunities in clean, renewable energy like hydroelectricity, solar and wind power in Europe. The early experience helped them gain valuable insights into the risk profile of the space and its future. Fast forward to today and with technologies improving and costs declining, renewable power is now both emissions-free and highly economic. We continue to build on our investment platforms, and with five major investments over the past several years, renewable energy investments make up more than one-quarter of our Infrastructure portfolio.

“In 2017, we became the largest shareholder in Pattern Energy, one of the best-regarded wind developers and operators in North America. This deal was unique in that we created a co-investment relationship where we have positions in both the private and listed entities of Pattern Energy and we have the right to acquire more assets directly as the business grows,” said Michael Larkin, Director, Infrastructure Investments.

“The devil is in the details when it comes to executing complex deals like this. We needed to adapt the transaction to Pattern Energy’s structure, while ensuring that it would be a meaningful, large-scale investment program for us. I’m proud to say that we achieved both objectives.”

If further proof of the wisdom of our investment was needed, we had only to look at Pattern Energy’s Meikle Wind power facility in British Columbia, which was recognized by Clean Energy BC in 2017 as a shining example of how to bring together zero-carbon energy generation, local economic development and sustainable business.

Highlights

Leading US-based independent renewable energy company

Operating more than 4,500 MW of wind and solar power projects

Utility-scale projects in the US, Canada, Chile, and Japan, as well as additional development projects in Mexico

The largest wind power producer in Canada with 1,533 MW operational capacity

9 facilities across 4 provinces

From left to right Patrick Chabot, Manager and Michael Larkin, Director, Infrastructure Investments

From left to right Cyrus Aga and Louis-Éric Bonin, Associates, Infrastructure Investments

 Anthony Lence Roy, Mont Sainte-Marguerite wind power facility, Québec, Pattern Energy

Public Markets1

$76.7

Billion
Net AUM

$6.3

Billion
Investment income

8.3%

1-year
rate of return

10.6%

5-year
annualized return

1 Includes public market equities and government fixed income.

Public Markets is composed of public equity, absolute return and fixed-income strategies. Investments are managed by both internal and external managers using a combination of active, absolute and index-replication strategies. Public Markets provides scalable portfolios to deliver the benchmark performance of certain public markets asset classes within the Policy Portfolio, adds value through active management within risk limits, and accounts for more than 50% of assets under management.

Real Estate

$23.2

Billion
Net AUM

$2.8

Billion
Investment income

13.6%

1-year
rate of return

12.7%

5-year
annualized return

Real Estate focuses on building a world-class portfolio of assets in major international cities, based on global themes such as technology, lifestyle, urbanization and demographics. We prefer to own assets directly with first class partners that have local expertise and are aligned with us in creating value and generating return. We also invest with a few select funds in specific markets or strategies where direct ownership is more challenging.

Geographic diversification

As at March 31, 2018 (%)

  • 41.5 US
  • 21.6 Canada
  • 20.8 Western Europe
  • 10.3 Emerging countries
  • 5.8 Australasia

Diversification by sector

As at March 31, 2018 (%)

  • 30.9 Residential/Retirement
  • 29.2 Office
  • 15.9 Industrial
  • 15.1 Retail
  • 4.3 Other
  • 2.7 Health care
  • 1.9 RE Debt

Private Equity

$19.4

Billion
Net AUM

$2.1

Billion
Investment income

12.9%

1-year
rate of return

7.9%

5-year
annualized return

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. Over the last three years, our team, strategy and portfolio have undergone significant transformations, and results of the implemented program have exceeded expectations in fiscal year 2018.

Geographic diversification

As at March 31, 2018 (%)

  • 46.1 US
  • 28.5 Europe
  • 16.5 Emerging markets
  • 6.2 Canada
  • 2.1 Asia
  • 0.3 Other

Diversification by sector

As at March 31, 2018 (%)

  • 22.2 Financials
  • 17.3 Consumer discretionary
  • 14.4 Industrials
  • 14.3 Health care
  • 12.3 Technology
  • 9.9 Communications
  • 4.4 Energy
  • 3.9 Consumer staples
  • 1.3 Other

Infrastructure

$15.0

Billion
Net AUM

$2.3

Billion
Investment income

19.3%

1-year
rate of return

13.8%

5-year
annualized return

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.

Geographic diversification

As at March 31, 2018 (%)

  • 37.4 Europe
  • 29.3 Emerging markets
  • 22.8 US
  • 6.3 Asia and Oceania
  • 4.2 Canada

Diversification by sector

As at March 31, 2018 (%)

  • 45.7 Industrials
  • 39.6 Utilities
  • 7.4 Communications
  • 5.4 Energy
  • 1.9 Technology

Natural Resources

$4.8

Billion
Net AUM

$450

Million
Investment income

11.2%

1-year
rate of return

13.1%

5-year
annualized return

Natural Resources focuses on direct investments in real assets in timber, agriculture, and other related opportunities, which are well suited to the liability profile of the pension plans that PSP invests for. Natural Resources’ strategy will continue to prioritize direct, long-term investments and building scale with like-minded operational and financial partners. The group believes its partnerships with a growing number of best-in-class, local operators provide it with meaningful comparative advantages.

Geographic diversification

As at March 31, 2018 (%)

  • 60.7 Australasia
  • 34.8 North America
  • 4.5 Other

Diversification by sector

As at March 31, 2018 (%)

  • 52.3 Timber
  • 36.1 Agriculture
  • 9.6 Oil and gas
  • 2.0 Other

Private Debt

$8.9

Billion
Net AUM

$569

Million
Investment income

8.2%

1-year
rate of return

16.5%

Since inception
annualized return
(2.3 years)

Private Debt focuses on direct non-investment grade primary and secondary credit investments in North America and Europe, in both private and public markets. Our global team in New York, London and Montréal commits to large positions across the debt capital structure in the form of loans and bonds. The group balances credit quality, structure, deployment opportunity, risk-return profile, asset mix and portfolio diversification, among other considerations.

Geographic diversification

As at March 31, 2018 (%)

  • 75.1 North America
  • 24.0 Europe
  • 0.9 Oceania

Product split

As at March 31, 2018 (%)

  • 47.3 First Lien
  • 52.7 Non First Lien

Diversification by sector

As at March 31, 2018 (%)

  • 24.2 Health care
  • 18.4 Technology
  • 14.1 Industrials
  • 12.5 Consumer discretionary
  • 11.2 Financials
  • 8.1 Communications
  • 5.4 Materials
  • 3.4 Energy
  • 2.6 Consumer staples
  • 0.1 Utilities

Complementary Portfolio

$2.2

Billion
Net AUM

$536

Million
Investment income

33.0%

1-year
rate of return

31.4%

Since inception
annualized return
(1.3 years)

The Complementary Portfolio focuses on investments that are not within the mandate of an existing asset class but are deemed beneficial for the total fund. It provides PSP Investments with additional flexibility by making it possible to capture investment opportunities that would not otherwise be pursued.

Geographic diversification

As at March 31, 2018 (%)

  • 100.0 US

Diversification by sector

As at March 31, 2018 (%)

  • 59.1 Financials
  • 32.1 Communications
  • 8.8 Materials