Room151’s first Private Markets Forum drew a crowd of more than 60 LGPS investors to discuss investments in unlisted assets at an auspicious time, amid stickier than expected UK inflation figures and further Bank of England rate hikes, while addressing possible sources of diversification.
Attendees at Room151’s inaugural Private Markets Forum at the London Stock Exchange in late June were challenged to develop a forward-looking perspective on the asset class by Aoifinn Devitt, CIO at Moneta, who opened the event.
While Edward Palmer, partner, CIO and head of sustainability at AlphaReal, outlined in his keynote speech how the improved funding position of LGPS schemes due to the rise in gilt yields combined with persistently high inflation has led to a renewed focus on income generation.
He argued that in shifting their focus on secure income in private markets, LGPS investors could potentially establish a tool to meet liability cashflows whilst benefiting from inflation-linked returns.
Searching for solutions
Two members of the first discussion panel of the day said their authority’s pension fund was looking to increase assets within private markets in the future.
“Within private markets, our focus will be more towards income generation,” said Adil Manzoor, senior portfolio manager, alternatives and monitoring at Merseyside Pension Fund. “This is because we are a mature pension scheme, which means we have more pension payments going out than contributions coming in. So, we constantly need to look for yields and this presents a good opportunity.”
David Spreckley, head of pensions and treasury at the London Borough of Barnet, said part of private market’s appeal is the opportunity to achieve impact more directly than in listed markets. “I think we’ll be searching more on the impact and net zero side within private markets, as this is an area where we are searching for the solutions. We’re probably more likely to find those solutions in the private space opposed to the public space.”
Leandros Kalisperas, chief investment officer at West Yorkshire Pension Fund, agreed that the private markets space allows pension funds to achieve impact, especially on the energy transition. However, he warned that there are risks associated with reallocating capital away from public markets and towards private markets.
Secondaries – concentrated buy side
The debate then moved to secondaries, which much like the broader asset class has seen a significant influx of assets. David Atterbury, managing director at HarbourVest, argued that the growth of the secondary market was in large part driven by the rapid growth of private markets, with assets then changing hands in the secondary markets. “There has been a real influx of opportunities,” he said. But Atterbury also warned that on the buy-side, the market was heavily concentrated.
Adi Bhagwat principal, strategic equity at ICG (above), drilled down the debate with a focus on GP-led transactions, which have seen a near fivefold increase since 2017. This growth has been led by GP-led adoptions, Bhagwat said. “As this is still a relatively nascent market, there is insufficient GP-led capital relative to the opportunities,” he added.
GP-led transactions can play a role in liquidity provision at a time when liquidity in LP-led transactions has somewhat dried up, due to LPs not selling assets, he argued.
But William Bourne, an independent advisor at Linchpin Advisory, drew the audience’s attention to some of the potential challenges of investing in secondaries. He acknowledged that liquidity was a perk of the asset class but also warned that for investors who were selling, valuations could be a key challenge.
Private debt
Bruce Richards, CEO and chairman at Marathon Asset Management, kicked off the second round of debates on opportunities in private credit, with the argument that the hike in rates and equity market volatility introduced “a golden era of credit”. Richards argued that the coming wave of defaults as a result of rate hikes represented an opportunity for private credit investors.
Lei Lei, co-head European credit opportunities, alternatives at Ninety One, highlighted opportunities in asset-backed sponsorless markets which he described as “less competitive.” While the distressed debt and sponsored direct lending market has dozens of players, the sponsorless market is dominated by five or six players, he said.
Trevor Castledine, managing director, private markets at bfinance and independent advisor South Yorkshire, responded by arguing that a lot of forecasts for credit margins had been optimistic. “We are seeing forecasts of 5%, but that margin is going to be reset every quarter, so you have to be realistic about what your returns will be,” he emphasised.
Net zero opportunities
Another key panel session looked at the investment opportunities that arise from following a net zero investment strategy.
Barney Coles, managing director, co-head of clean energy at Capital Dynamics, highlighted the scale of the energy transition required and the importance of investing in infrastructure that corresponded to the UK’s current use of energy use. He mentioned green hydrogen as one of the key investment opportunities in the renewable energy transition, though he acknowledged that its rollout might take longer than anticipated.
Mark Lyon, deputy CIO at Border to Coast, followed up on the theme of energy transition by outlining the key aspects of the pool’s £12bn private market portfolio and its approach to reaching net zero. In addition to a £4bn renewable energy strategy, the pool last year launched a climate opportunities strategy which looks at investments to support the transition to a low carbon economy, including assets such as private debt and forestry.
Levelling up
A day of debates was wrapped up with one of the most hotly debated items on the LGPS’s investment agenda: the government’s levelling up agenda and the potential role of LGPS investors in providing capital to fund the regeneration of historically underfunded areas in the UK.
The last thing we want is the government giving us some good ideas; that is unlikely to result in optimal outcomes. But I think pools can be part of the solution here.
George Graham, South Yorkshire Pension Fund
George Graham, director of the South Yorkshire Pension Fund, noted that the concept of levelling up was not new but investments had to be beneficial to the fund. “The important thing is that this is investment, it might be investment with a purpose but it is still investment,” he stressed. Consequently, it might be more labour intensive to implement but it should not be more risky than other assets, Graham emphasised.
Stephen Wild, head of pensions & treasury at OneSource, outlined how Havering and Newham Council, the funds he worked with, have increasingly started to prioritise investments in social housing.
“Investing in housing is not the panacea that people think it is, particularly not at the social end, so we had to be familiar with not just the advantages but also the potential pitfalls,” he said. The funds have now invested in projects which are aimed at helping people get out of temporary accommodation. He stressed that investors should always be mindful of local housing strategies in order to not drive up prices in the region.
Anne Copeland, co-head of social infrastructure at AlphaReal, stressed the opportunity of establishing strong governance standards with data and reporting having improved dramatically.
Speaking from an allocator perspective, Bola Tobun, treasury & pensions manager at the London Borough of Harrow, highlighted the challenges of sourcing suitable investments that align with the United Nation’s Sustainable Development Goals.
She stressed that some smaller funds have been deterred by higher management fees in private markets, but that pools have helped to make the asset class more accessible. “It would be good to have public impact investments, if the government can help on that area and provide a fund structure we can all invest in, that would make our lives easier,” she suggested.
Her suggestion was challenged by Graham: “The last thing we want is the government giving us some good ideas; that is unlikely to result in optimal outcomes. But I think pools can be part of the solution here.”
