Investor spotlight: USS cuts out the middle man

Institutional investors are increasingly getting their hands dirty. Not content with simply allocating to a manager and paying the accompanying fees, pension funds are hiring their own credit teams and originating loans themselves to mid-market companies.

It’s a statement of the increasing confidence LPs have in an asset class that can promise double-digit returns in a period of low yield. But now one pension fund has taken a step further and is getting involved in providing loans to direct lenders.

The Universities Superannuation Scheme, a £49 billion ($61.2 billion; €57.2 billion) UK pension fund, has teamed up with Credit Suisse to provide fund financing to global asset managers operating senior debt investment strategies.

Under the terms of the agreement, USS will manage loans valued at $3.1 billion made to direct lenders in the second half of 2014 and throughout 2015. All transactions are senior financings and Credit Suisse will maintain a minority stake, while providing risk monitoring services and using its resources to continue to originate loans to small and medium-sized enterprises across Europe.

Pension schemes taking private debt strategies into their own hands is nothing new, but providing fund leverage is a first. According to USS, more institutional investors are expected to participate in its collaboration with Credit Suisse as they sense the opportunity.

Ben Levenstein, head of private debt at the pension scheme, says the firm pursued the venture because it has “flexible capital in its illiquid allocation” and “seeks out investment opportunities that have different risk-adjusted return profiles”.

Under Mike Powell, head of private markets group at USS, the illiquid team seeks out a premium for complexity and illiquidity versus liquid, listed assets. USS has a track record of executing transactions and managing assets with a long-term approach aiming to build enduring relationships with counterparties.

The deal marks a defining moment in a tumultuous period in Credit Suisse’s recent history. Since taking over as chief executive in 2015, Tidjane Thiam has had the difficult task of restructuring the bank’s operations. Boosting income by focusing on improving wealth management operations has been key to its long-term restructuring plan, which has seen headcount slashed, the BDC unit sold and its presence in the distressed debt market reduced.

The issues at Credit Suisse echo across the European banking sector and the narrative of retrenchment and withdrawal from the mid-market lending space applies to most financial institutions. And while private debt funds have managed to surpass banks on flexibility and speed, many have found that partnering with the leading financial institutions can bring the most fruitful returns.

LPs see this opportunity too and, as in the case of USS, are now confident in engaging directly with banks. “USS is always seeking to innovate,” notes Levenstein and the latest initiative is part of a tradition of doing things differently at the pension fund. 

Credit Suisse timeline
July 2015: Tidjane Thiam joins as chief executive from Prudential
March 2016: Credit Suisse announces it will make savings of SFr4.3 billion and plans to cut 6,000 jobs
May 2016: Sells distressed assets valued at $1.24 billion to TSSP, reports distressed portfolio has been reduced by 79 percent across Q1 2016
October 2016: Confirms sale of BDC unit to Cion – paying $276.9 million for the platform