The London Stock Exchange, home of the UK’s listed equities market, hosted Room151’s second Private Markets Forum, drawing delegates and investors from across the LGPS.
The event began with a welcome from the chair for the day and CIO of London CIV, Aoifinn Devitt (pictured right). She described private markets as “one of the most intriguing areas of storytelling in the world of investing”, with the potential to spark conspiracy theories and mistruths.
She noted that challenging macroeconomic and geopolitical backdrops were likely to affect private markets, although some sub-asset classes such as private equity and credit had shown resilience. Devitt also questioned whether challenges in real estate could signal more difficult times ahead.
Evolving allocations
Richard Hope, co-head of investments at Hamilton Lane, discussed the longer-term perspective for private market investments, highlighting that over a ten-year rolling period, private equity has outperformed public markets. Addressing concerns about overvaluation, he argued that cumulative private equity returns were still below those seen during the dotcom bubble and the global financial crisis. However, he acknowledged the more challenging landscape for investors today and emphasised the importance of transactions through secondaries and co-investments for effective capital deployment.
Alex Brierley, co-head of Octopus Energy Generation, shared the firm’s approach to investing in renewable energy, driven by trends observed within Octopus Energy, the UK’s largest supplier of renewable energy. He stressed that their investment decisions are influenced by customer demands and market trends.
Tim Mpofu, head of pensions and treasury at Haringey, discussed the liquidity requirements for the LGPS, noting that his fund had a cash requirement of 0.5%. With a long-term investment horizon, the fund could benefit from liquidity premia. Richard Tomlinson, CIO at LPPI, countered the notion that index funds always yield better returns, highlighting the importance of private markets for long-term investors.
Alex Bull, head of pensions at Torfaen County Borough Council, part of the Wales Pension Partnership, noted that while his fund had relatively lower exposures, it was crucial not to frontload allocations and to ensure sufficient capital for future opportunities.
Demystifying private credit
Private lending has dominated LGPS investment discussions over the past year, with myths and fears of shadow banking persisting. Aoifinn Devitt highlighted the need to address these concerns.
Stuart Fiertz, co-founder, president & head of responsible investment at Cheyne Capital, kicked off the discussion by outlining the fundamentals of the asset class. Drawing the distinction between sponsored and non-sponsored lending, he argued that the power dynamics in private lending had changed, rendering non-sponsored lending as relatively more attractive. “Think about the origination channels; this will give you a sense of the different dynamics between lender and borrower and the different power relationships. The borrower in a sponsored deal keeps the pen rather than the lender, which is why covenants are so weak in the sponsored world,” he stressed.
The borrower in a sponsored deal keeps the pen rather than the lender, which is why covenants are so weak in the sponsored world
Stuart Fiertz, Cheyne Capital
Emaad Sami, product & solutions director for infrastructure credit at Schroders Capital, outlined how investing in hard assets could offer investors some much needed downside and inflation protection in an increasingly uncertain macro environment. “Infrastructure debt has shaken its image of being all long duration, Solvency II friendly and a safe play for insurers. The market is now much more mature. You can have medium to short term duration strategies within that market with profiles not too dissimilar to direct lending,” he argued.
Raymond Wright, private markets portfolio manager at London CIV, outlined the pool’s diversification into broader private credit strategies, stressing the importance of selecting experienced managers.
Philip Pearson, senior investment consultant at Hymans Robertson, argued that private credit still had a role as a safety and growth asset despite potential headwinds. He noted the diversification of the asset class since 2011, with investor interest now spanning the risk spectrum.
The long-term view
John Clark, founder and president of Performance Equity, delivered the keynote speech, emphasising that while private equity has changed since the 1990s, the principles of investing in the asset class have not. He highlighted the company’s success in capitalising on private equity through venture capital and co-investments.
Despite concerns about the risk profile of venture capital, Clark argued that investing with top-quartile managers within a fund can offer significant outperformance.
Local impact
The discussion then turned to political intervention in investment strategies, focusing on the government’s drive for LGPS funds to invest 5% of their assets into local impact projects. Mark Lyon, deputy CIO at Border to Coast Pensions Partnership, emphasised the importance of due diligence in selecting investment opportunities.
Peter Bachmann, managing director for sustainable infrastructure at Gresham House, and Jos Seligman, investment director and fund manager at Swiss Life Asset Manager UK, echoed the sentiment that investors no longer have to sacrifice returns for impact.
Market headwinds for infrastructure
Edward Palmer, partner and CIO at AlphaReal, set the macroeconomic backdrop for infrastructure investment, discussing high UK inflation and the absence of interest rate cuts. Despite these headwinds, investment in UK renewables remained attractive.
Stephen Dowd, global infrastructure CIO at CBRE, highlighted the growing need for these assets. Nadeem Hussain, head of private markets at LGPS Central, noted that the pool’s balance between open-ended and close-ended funds had mitigated the impact of the macroeconomic environment on income from infrastructure assets.
Adil Manzoor, head of private markets at Merseyside Pension Fund, discussed political headwinds and cyber security threats to infrastructure assets.
Uncertain outlook
Central bank base rates and funding levels were key concerns at this year’s Private Markets Forum. While private markets have shown resilience to higher borrowing costs, there is caution about the future. Investors recognised the need to generate returns despite current favourable funding levels, which might change if rates come down.
Secondaries
Despite this changing environment, secondaries have attracted growing investor interest. David Atterbury, managing director at HarbourVest, noted the significant growth in the secondaries market, driven by the availability of private equity assets and the need for liquidity.
He noted a “step-change” in the secondaries market in recent years, with well over £100bn worth of transactions being closed in 2023. This has been driven by the stock of private equity assets available, and the need for liquidity across the market today.
Achal Gandhi, CIO – indirect real estate strategies, chair of the global DE&I council at CBRE Investment Management, described a “significant” capital markets dislocation in the real estate secondaries market. But in a “story of two halves” there is no occupier market dislocation, as rental growth continues to be positive. All in all, the conditions are right to acquire real estate secondaries at a “trough point” in the market, he said.
Vanessa Shia, head of private markets at London CIV, explained why secondaries should be a key part of an LGPS portfolio, having helped to address some of the challenges investors have faced.
“The key benefit is immediate deployment, and you can see the return quicker,” she said. She also noted that better quality assets had come to the market as LPs had rebalanced their portfolios, with this being the key difference today compared to a few years ago.
Private equity
Andrew Carnwath, director at Columbia Threadneedle, acknowledged the impact of higher rates on private equity but highlighted the untapped opportunities in unlisted markets. He stressed the potential of impact investing strategies in private equity. Lawrence Rusoff, managing director at Performance Equity, discussed the benefits of a fund of fund structure for smaller investors seeking exposure to venture capital and middle market buyout strategies.
Neil Mason, assistant director and LGPS senior officer at the Surrey Pension Fund, opened up the debate by expressing scepticism of current funding levels for his £5.2bn fund, which according to the latest estimates is more than 130% funded. But Mason argued that there was still a case to be made for investing in private markets. The fund, which is part of the Border to Coast pool, currently holds around 20% of its portfolio in private markets.
This also resonated with Stephen Wild, head of pensions & treasury at the London Borough of Newham, who revealed that his £1.7bn fund had recently doubled its allocation to private equities to 10% of the overall portfolio, based on the advice of its consultants. Having said that, he admitted that the outlook for the asset class was becoming more challenging and stressed that he kept a close eye on the portfolio.
This country has a long history of privatising profits and socialising debts; I look to our colleagues at Border to Coast to ensure we are with the right managers
Neil Mason, Surrey Pension Fund
Policy and governance risks in private markets remained a concern, with water and rail companies making negative headlines, Mason said, but he also expressed confidence that the pool was able to avoid these underperforming companies. “This country has a long history of privatising profits and socialising debts; I look to our colleagues at Border to Coast to ensure we are with the right managers,” he stressed.
Natural capital opportunities
Andy Turnbull, senior investment manager at Federated Hermes, discussed the growing demand for natural capital, driven by the global push towards net zero and nature restoration. He highlighted the investment opportunities in the UK’s high-integrity nature markets.
Stephen Levesque, managing director of forest operations at Campbell Global, emphasised the inflation-hedging benefits of natural capital investments.
John Raisin, independent advisor at Merseyside, noted the growing popularity of natural capital was accelerated by improved funding levels and regulatory pressures.
Housing
The final discussion focused on the UK’s housing crisis and the need to fund the housing stock. Adrian D’Enrico, fund manager at Edmond de Rothschild Asset Management, highlighted the scale of the crisis and the potential of affordable housing as an income-generating asset with inflation linkage. Shamez Alibhai, head of community housing at Man Group, discussed the structural nature of the UK’s housing crisis and the investment opportunities in the sector.
Paddy Dowdall, assistant executive director at Greater Manchester Pension Fund, explained the challenges for local authorities in executing housing development, with taking on responsibility for the construction often not being a lucrative option for pension funds. “Over the past five years, I have seen more investable opportunities for affordable housing with a capital A, but I am not sure that is great for the country. We’re not here to beat the lowest cost of capital, we are here to make more money than gilts,” he added. Whilst housing was not the highest returning asset classes, it offered attractive risk adjusted returns, Dowdall emphasised.
Liz Carey, independent advisor to the LGPS, highlighted the lessons to be learnt from the US market in bringing down the cost of capital to improve access to housing.
In conclusion, the second Private Markets Forum provided valuable insights into the evolving landscape of private markets, the challenges and opportunities in various asset classes, and the growing importance of impact investing and natural capital.
