WMPF to give Brum SMEs £40m boost as funds seek social impact

Direct lending to small and medium-sized businesses has grown in popularity among pension funds as regulation has made traditional derivative cash flows more expensive, according to market experts, with some funds also attracted by the possibility of a beneficial social impact in their local areas.

The £9.8bn fund will invest in local businesses through an investment partnership with Finance Birmingham, a public-private partnership aimed at providing capital and investment to businesses in the region.

“We expect the investment to achieve the fund’s target investment return [6.9 per cent a year],” said Antony Ellis, communications officer at the fund.

“In terms of social impact, most immediate and important would be generating and hopefully sustaining employment in the West Midlands.”

The partnership will draw down on the fund’s investment as and when opportunities are identified over the next few years. Direct lending has grown in popularity in recent years as a way for small and mid-sized companies to obtain financing.

Earlier this year, Waltham Forest Pension Fund invested in a £20.8m impact investment fund as a means of diversifying returns and creating positive social impact.

George Pickford, head of institutional sales at finance intermediary ClearlySo, said: “Public-private partnerships are a great way of capitalising on the space.”

He added government-created financial institutions such as Big Society Capital may invest in direct lending funds with social impact at their inception, taking a capped return so that investors benefit from outperformance.

A report by fund manager M&G Investments, Borrowing Without Banks, outlined benefits of direct lending for businesses, including longer-term financing and ease of access.

“This is particularly applicable to smaller companies that may have many of the features of an investment-grade credit rating but not the official stamp of approval from a rating agency,” the report states.

Direct lending may also provide a useful way to diversify away from more traditional assets, especially for institutional investors who can more easily take a long-term view.

Jo Waldron, director in M&G Investments’ alternative credit fixed income team, said: “Because these loans are illiquid you get an illiquidity premium. You get a little bit of extra return and diversification.”