Jumping into the pool

UK local government pension funds are starting to pool their assets as part of an ambitious consolidation project, but a selection of London managers have clubbed together to advance their more sophisticated plans for private debt. John Bakie reports

In late March, five London-based local authority pension funds launched a £250 million ($338 million; €285 million) mandate to invest in private debt funds, their first foray into the asset class.

The task of searching out and selecting suitable managers will be managed by London-headquartered investment consultant bfinance. PDI caught up with Sam Gervaise-Jones, head of client consulting for the UK & Ireland at bfinance, to discuss the needs of these funds.

Since it was first announced in the 2015 budget, local authorities have been pooling their resources under the Local Government Pension Scheme programme to give the 89 separate funds across England and Wales more combined investment power and boost returns.

Pooling aims to reduce investment costs for the funds, but also to motivate them to reorganise their operations to help the funds become more effective investors in the broader economy. Funds in London are managed under the London Collective Investment Vehicle, which has a total of £25 billion in assets under management from 33 local authority schemes.

However, sometimes these funds are forced to seek additional pooling opportunities outside of the London CIV structure, which is where bfinance comes in.

“When you start pooling local government schemes, you need to work through a lot of different asset classes, and this has tended to start with the larger and more liquid areas,” says Gervaise-Jones.

“This means some areas get pushed down the priority list, such as private debt, but a number of London boroughs felt they are at a more advanced stage and wanted to get access to the asset class.”

The five funds seeking private debt exposure, the London Boroughs of Ealing, Havering, Lambeth, Wandsworth and Merton, were said to be frustrated that the pooling structure could not yet meet their needs and so decided to get together to seek a different way forward.

Their allocation is substantial, worth at least £250 million and accounting for 5.5 percent of the five boroughs’ total assets under management. There is also the option for additional London borough pension schemes to join them and augment the total capital available for investment.

The pension funds are all driven by the same rationale, according to Gervaise-Jones, which is to enhance their returns but with a similar risk-return profile to existing investments, which isn’t limited to simply reallocating fixed income money.

“The sources of this allocation differ from investor-to-investor, with diverting funds allocated for public market credit, while others are moving equity allocations into private debt,” he says.

As well as gaining diversification of assets, pension funds are also seeking exposure to assets that will derive more of their returns from income rather than capital growth, the London Borough of Ealing said when the mandate was announced.

Most funds have benefitted from their significant equity exposures over recent years, where a relatively benign economic environment and low volatility has led to strong returns in both public and private equity.

However, since volatility returned to markets this year, the London pension funds now wish to cut their exposure to equities that are heavily reliant on asset growth to bolster returns. They want to cut their risk exposure, but still receive strong asset-backed returns. In this context, private debt looks especially attractive compared with many other asset classes.

The magnificent eight

The 89 local government pension funds spread across England and Wales have now finalised their asset pooling plans and are ready to start bringing assets on board. The funds are divided into eight asset pools run by regulated entities which will eventually be responsible for almost all local government pension assets.