LP View: Panic and caution follows Brexit vote

While a number of open-ended real estate funds suspended trading following investors’ retreat, institutional investors have adopted a more cautious stance as the implications of Brexit become clear.

In the lead up to the vote on the UK’s membership of the European Union (EU), a number of key economists warned that house prices would fall if it resulted in a Brexit. It was the central plank of Chancellor George Osborne’s argument put to voters during the campaigning stage. Such warnings, however, failed to convince the majority of the electorate.

Spooked by the result and a possible downturn in the real estate market, a number of retail investors sought redemptions from open-ended funds estate such as Standard Life, Aviva and M&G Investments, forcing all three to suspend trading in two days. Panic set in as these firms sought to reassure investors that the UK market still presented opportunities.

For institutional investors, however, the picture is one of caution. Trevor Castledine, deputy chief investment officer at Local Pensions Partnership Investments, an organisation that manages more than £11 billion of pension fund assets, said he is comfortable with the portfolio’s existing exposure to private debt.

“Our approach has always been to build a conservative portfolio that is carefully underwritten and avoids situations with particularly high leverage. We seek to avoid refinancing risk through the use of mainly amortising loans and cash sweeps.

“There will be some positions in private debt portfolios that will default and recovery expectations in a depressed market might be reduced; so having a conservative portfolio, rather than one that has highly leveraged, sponsor driven syndicated loans should see us holding a relative advantage,” he said.

A number of operators in the market have repeated anecdotes that investing in private debt as an asset class appears more attractive during these volatile times compared with infrastructure or equities. The majority of those investing in the open-ended vehicles were retail investors, who lack the foresight and experience of pension funds which have worked through a number of credit cycles in the past.

However, the overall sense is that it is “too soon to tell” and making judgments on whether to allocate more or less to private debt in the medium term is too difficult for fund managers at this stage. Castledine said that private debt takes up 15 percent of the institution’s portfolio, which is divided between investments in real estate and small and medium-sized enterprises, while avoiding infrastructure debt. He said there is “scope for additional deployment”, but there are no existing plans to increase its commitment. Although this may change as existing investments reach maturity, he said.

Echoing the sentiment, the Investment Association, a body representing UK-based institutional investors, affirmed the cautious tone. Just hours after the vote was announced, the organisation issued a note stating that it is “confident our industry will be able to continue to compete overseas, both in the EU and the rest of the world”.

It added: “The short-term focus will be on how markets respond, but it is important that we adopt a collective long-term focus on how the UK can preserve the pre-eminence of its financial services including our highly successful £5.5 trillion asset management industry.”

The differing responses of investors echo PDI’s reports on the market at large. Where some see despair, others see opportunity. But a ‘wait and see’ approach from institutional investors who have worked through numerous credit cycles is perhaps the only feasible position to adopt as UK politicians still get to grips over what Brexit really means.