Scottish pension earmarks £600m for credit funds

One of the biggest public pension fund managers in the UK is assessing individual funds for private debt investments and a multi-asset credit manager for an allocation worth £600m in total.

Strathclyde Pension Fund is to source private debt opportunities worth £300 million (€405.3 million; $454.9 million), according to quarterly committee documents dated 31 August 2015.

The £15.5 billion Scottish pension fund manager has also launched a procurement process for a multi-asset credit mandate, again for £300 million.

Strathclyde Pension Fund, one of the largest public pension schemes in the UK, has made the £600 million allocation with the aim of boosting short term-enhanced yield and as part of a move to implement a more diversified strategy using a new risk-based asset framework, it said. The manager is expected to finalise commitments to several private debt managers within the next three to six months, PDI understands.

The core objective of the strategy is to deliver an absolute return higher than cash or short-term bonds with a high degree of predictability, the meeting documents show. Overall, Strathclyde is seeking expected yield ranges from LIBOR plus 1.5 percent to LIBOR plus 10 percent, or higher in the case of distressed debt.

Strathclyde will invest in a number of individual private debt funds with a focus on senior secured loans, either first or second lien. Funds might also include some mezzanine, unitranche, real estate or infrastructure debt and a small portfolio of equity. It is targeting fund returns of LIBOR plus 4 to 6 percent net of fees and costs. Strathclyde has identified key risks such as issuer default, early repayment leading to a loss of yield enhancement, implementation risk and liquidity risk with the strategy. There is an option to use a fund-of-funds approach, though this is not preferred, according to the proposal.

Strathclyde also aims to appoint a single investment manager on its multi-asset credit allocation via a procurement process on OJEU. The mandate will focus on high yield debt and syndicated loans. It will also combine a variety of more liquid options and may include some distressed debt and emerging market debt.

The multi-credit manager would rotate assets over time to the opportunity set providing the highest return per unit of risk. Loans would be floating rate and the typical mandate return expected is LIBOR plus 4 percent per annum of fees.

In March, Strathclyde decided to reduce its fund’s exposure to equities. Modelling suggested that the first stage of its new strategy should involve a “significant increase in short term enhance yield investments”, the fund said, currently limited to a PIMCO mandate targeting a return of LIBOR plus 2 percent.

The manager considered a wide range of alternatives, all based on lending. “Many result from bank retrenchment as a result of increasing regulation, and increased demand for non-bank intermediaries to provide capital to meet the credit needs of the economy,” the proposal reads.

Investment consultant, Hymans Robertson, is assisting Strathclyde. Further implementation proposals are expected to be utilised including both strategic and opportunistic investments.

Glasgow-based Strathclyde made a commitment to private debt earlier this year, investing £20 million in Muzinich’s first UK private debt fund, according to minutes from a committee meeting on 1 June.