The Strathclyde Pension Fund has made large allocations to both private debt and multi-asset credit as it looks to take advantage of the growth in non-bank intermediaries.
Pension funds' appetite for private markets and illiquid investments has grown in recent years, as return opportunities elsewhere are diminishing.
In the Strathclyde scheme's most recent report and accounts, Bailie Philip Braat, Glasgow city treasurer and convener of the fund, revealed it has invested £300m in private debt and £450m in multi-asset credit.
We’ve been prompting our clients to consider an allocation to private debt for some time now. It’s an area that has been growing. The high returns you get from a credit investment make it appealing
Sanjay Mistry, Mercer
A spokesperson for the pension scheme said: “The fund recently carried out a review of its investment strategy, and this is one of the outcomes now being implemented. Broadly speaking, we think bank retrenchment has created an opportunity to capitalise on demand for non-bank intermediaries to provide the capital that meets the economy’s credit needs.”
The allocations will be run through externally managed funds, and target a minimum absolute return of Libor + 4 per cent combined with a high degree of predictability, the spokesperson added.
Multi-asset credit is in demand
Multi-asset credit has become increasingly popular among schemes looking to secure income as their liability profiles shift towards being cash flow negative. Earlier this year the London Borough of Hounslow Pension Fund committed £100m to multi-asset income.
Daniel Peters, partner at consultancy Aon Hewitt, said he was seeing pension fund demand for multi-asset credit increase, “often replacing at least part of the corporate bonds” in scheme portfolios.
He said typically funds invest through a pooled fund, but added his preference is for set-ups where the manager has increased discretion over the allocation.
“I personally prefer the approach where the manager has that flexibility, but they have to be able to demonstrate they can use it effectively,” he said.
Pension funds fill direct lending gap
Direct lending has seen a surge in demand in recent years as tighter regulations have deterred banks from offering loans to certain sectors. This has created opportunities for pension funds and other investors to allocate more heavily in real estate debt, infrastructure debt and direct loans to companies.
Some are betting big on the asset class: last year the Leicestershire Pension Fund committed its entire credit portfolio to direct lending, just one of many local authority schemes investing in the sector.
Sanjay Mistry, director of private debt and private equity funds of funds at consultancy Mercer, said: “We’ve been prompting our clients to consider an allocation to private debt for some time now. It’s an area that has been growing. The high returns you get from a credit investment make it appealing.”
He added: “It seems to be one allocation that’s coming through as part of their fixed income and growth fixed income portfolio. It’s growing in size and relevance.”
The pie has got bigger
As direct lending grows, Mistry said, investors are less susceptible to home bias, with more searching globally for attractive investments: “There has been a desire to extend the net of strategies that are covered.”
Hounslow commits £100m to multi-asset income
The London Borough of Hounslow Pension Fund has introduced a £100m allocation to multi-asset income in an effort to diversify as it moves towards being cash flow negative.
He also noted that more companies have begun to seek to raise money from private debt investment, making the number of opportunities increase.
Leicestershire to commit entire credit portfolio to direct lending
Leicestershire Pension Fund plans to move its entire credit portfolio into direct lending as it makes a further £100m investment in an asset class increasingly targeted by yield-starved pension funds.
“There’s more competition, but the pie has got bigger,” he said.
Niels Bodenheim, director of private markets at consultancy bfinance, said pension funds investing in the sector are competing against sovereign wealth funds and insurance companies for opportunities.
“Allocations have been increasing,” he said. “The reason for entering is usually search for yield, then diversification. When you look at the debt product itself, there’s [also] typically some form of interest rate protection.”
