Data crunch: Local authority schemes have committed more than £10bn to illiquid alternatives in 2022 as the hunt for inflation-linked cash flows and attractive returns intensifies, according to MandateWire data.
The data show that Local Government Pension Scheme funds have significantly increased their allocations to illiquid alternatives this year, compared with 2011.
Growing demand for illiquid assets comes at a time when the UK government is encouraging investment in domestic projects as part of its levelling up agenda.
Between January 1 and October 19, local authority pension funds allocated a net £10.4bn to illiquid alternatives, which is almost 24 per cent more than they invested during 2021.
Given the many attractions of private markets, we expect LGPS funds to significantly increase their allocation to these asset classes over 2022 and beyond
Alpha Real Capital
Infrastructure has been by far the most popular illiquid alternative among schemes over the past two years, accounting for a third of all alternatives mandate awards in 2021 and almost 36 per cent of all alternatives mandate awards this year.
However, private equity and private debt have overtaken property as the second and third most popular alternatives this year, as investors’ focus has shifted to private markets.
For instance, the £38.3bn Border to Coast Pensions Partnership, which handles the assets of 11 LGPS funds, completed the final £1.5bn of investment within its private market offering earlier this year.
The pool’s commitments were spread across infrastructure, private equity and private credit.
In a bid to reach its illiquid alternatives target allocation, the £5.5bn West Sussex Pension Fund told MandateWire in March that the scheme had made a £173mn commitment to private equity.
The pension fund has a 5 per cent strategic allocation to private equity, 5 per cent to private debt, 10 per cent to direct property, and 5 per cent to infrastructure.
Appetite for infrastructure
Expressions of interest – which comprise manager searches, planned investments in a new asset class, and planned investments in existing asset classes – in illiquid alternatives (infrastructure, property, private equity and private debt) have also remained high this year.
MandateWire tracked 55 instances of local authority schemes planning future investments in these assets between January 1 and October 19, compared with 56 tracked in 2021.
Infrastructure has attracted 31 per cent of all expressions of interest in illiquid alternatives this year, followed by property (27 per cent) and private equity (22 per cent).
One scheme with ambitious infrastructure investment plans is the £4.8bn Rhondda Cynon Taf Pension Fund, which has a 10 per cent target allocation to infrastructure.
Pension fund committee meeting minutes propose that the scheme should invest in infrastructure “over a number of years in order to secure and optimise opportunities across the different time periods (and vintage years)”.
Yvonne Keitch, principal accountant for treasury and pension fund investments at the scheme, told MandateWire that “because of the illiquid characteristics of infrastructure, we intend to step in at two stages to take advantage of vintage years”.
Support for local investments
Local authority pension funds’ growing focus on illiquid alternatives is also borne out by a LGPS fund survey by Alpha Real Capital.
The study, which surveyed 100 LGPS fund professionals in England and Wales, found that almost all (91 per cent) respondents predict that their funds will increase allocations to private markets.
The majority of respondents (60 per cent) expected the rise to be between 5 per cent and 10 per cent, while almost one in five said they would look to increase their private market allocation by 10 per cent or more.
“Given the many attractions of private markets such as long-income real estate, social infrastructure and renewables infrastructure, including predictable income, inflation linkage and low volatility, we expect LGPS funds to significantly increase their allocation to these asset classes over 2022 and beyond,” the report noted.
Timing and flexibility concerns raised over LGPS climate reporting
The pensions industry has expressed its concerns to the government over proposals surrounding new requirements for Local Government Pension Scheme funds to produce climate risk reports, citing fears over the timescale imposed and a lack of flexibility.
Almost 90 per cent of respondents also said their fund was planning to increase its allocation to local social investments over the next few years.
The survey pointed out that if just 5 per cent of LGPS funds’ combined assets were dedicated to local investment, it would unlock around £16bn for investment in assets that contribute towards positive social outcomes.
“The approach can be targeted or spread broadly at a national level, and we are seeing a growing trend towards place-based impacts that a hybrid national and regional approach offers,” it added.
This article originally appeared on MandateWire.com
