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Giving the devil his due

The UK’s Local Pensions Partnership is hiring a third party to test its assumptions as it brings more investment activities in-house.

When the UK-based Local Pensions Partnership recently announced it was seeking a third party to advise on proposed alternatives investments, the role to be filled was described as a kind of “devil’s advocate”.

The winner of the £3 million ($4 million; €3.4 million), 12-month contract (with option to renew every year for 10 years) will challenge LPP’s proposed capital deployments into private credit, private equity, infrastructure and liquid alternatives – providing a kind of sanity check on the organisation’s decision-making.

The move is interesting in the context of limited partners seeking to take more responsibility for investment decisions as they grow in scale, while not necessarily having the level of resource that would allow them to dispense with external advice altogether.

“We significantly reduced our allocation to the fixed income space long ago and have a range of alternative credit strategies”
Castledine

The LPP, a £12.8 billion pension fund, was formed last year when the London Pensions Fund Authority and Lancashire County Pension Fund Committee formed a joint venture. As it aims to reduce investment fees by £7.5 million per annum, LPP has already established pooled in-house vehicles for private equity and infrastructure – with a pooled credit fund anticipated by the end of the current financial year.

“We seek to do our own research and find our own opportunities, but it would be an arrogant organisation that thinks it’s got all the knowledge necessary and needs no other expertise,” says Trevor Castledine, deputy chief investment officer and head of credit at LPP.

“We’ve never been consultant-led but we test our thinking and it either gets challenged or reinforced.”

LPP is a substantial player in the private credit asset class, with around 15 percent of its portfolio dedicated to it (Lancashire having been slightly overweight at about 20 percent and London slightly underweight at approximately 10 percent prior to the joint venture). The allocation is currently worth around £2 billion.

“A common philosophy for us (Lancashire and London) was that we both had low strategic allocations to fixed income because of the returns we needed to meet our liabilities and traditionally fixed income hasn’t delivered,” says Castledine.

“So we significantly reduced our allocation to the fixed income space long ago and have a range of alternative credit strategies.”

Castledine says the organisation concentrates on trying to identify “pockets of value and mispricing”, such as emerging markets debt, where he claims the same credit quality can be found as elsewhere but with higher returns.

“With private debt, there are loads of different ways to invest,” he adds. “But there is a lot of pressure of capital and you need to be in places where you can avoid that pressure. For example, we dislike large syndicated facilities. If you’re the sole lender and you move down the size scale, you have more ability to impose the terms you want.”

Among the pockets of opportunity Castledine looks out for, are the possibility of enhanced yield from real estate debt at the higher LTV-end of the market where the banks won’t play; credit opportunities strategies where there are favourable regulatory or supply/demand dynamics; bank regulation-related plays; and “well-constructed” CLOs.

Castledine insists that bringing the London and Lancashire funds together has led to improved performance, cost savings and smarter investment decision-making. But, as the search for a “devil’s advocate” makes clear, LPP will not be resting on its laurels.