With the government pushing for more consolidation and infrastructure investments across the LGPS, DC and corporate DB, could the collaboration between Nest and GLIL be a sign of things to come?
GLIL, the £3.6bn infrastructure platform for the LGPS, is often heralded as an example of successful cross-pool collaboration. Since its inception in 2015, it has invested more than £2bn in UK infrastructure projects. But two years ago, something rather unusual happened.
Nest, the £30bn government-backed DC master trust, announced plans to invest £3bn in infrastructure, including a mandate with GLIL. On the face of it, the story of Nest’s investment in GLIL is straightforward, as Stephen O’Neill, head of private markets at Nest explains. “In 2021, we had permission from the investment committee to add infrastructure to our investment universe. We weren’t trying to market-time, but having onboarded private credit beforehand, we decided to move to infrastructure equity because we had sufficient interest from a few managers and thought we could probably get something at a decent price,” he explains.
“GLIL won our lot as UK core manager, in part because of the alignment of interest with the institutional LGPS money, also because of the commercial attractiveness of the LGPS pricing model which is a bit different to most managers. We also liked the assets they had in their portfolios, the values of their investment thesis were born out by their holdings.”
Liquidity and cost cap challenges
From GLIL’s point of view, the collaboration with a DC scheme was an “interesting opportunity to test our approach” as chief operating officer Ted Frith describes it. Albeit one that comes with its own challenges. “The DC world is quite different from the LGPS world, which are obviously fully funded DB schemes. The two most obvious challenges are liquidity and the cost cap,” explains Frith.
As with any capital allocation, the onus is on While this is not directly his turf, Frith expresses surprise at the government’s decision to effectively remove the DC charge cap. “It’s clearly possible for private market managers to operate underneath the cap, and Nest is a great example of being able to operate within that constraint,” he stresses.
On the requirement of daily pricing, Frith is also keen to emphasise that GLIL does not offer Nest or any other member any unique liquidity terms. “We’re not making any concessions in the fund to help any one investor manage their liquidity. That’s important for all of our investors; giving preferential liquidity to certain investors over others would put everyone in a bad place,” he says.
In practice, this means that Nest and GLIL have an understanding that they do not receive a different price every day. This information is then adjusted by GLIL on a quarterly basis, and the risk of these infrastructure valuations is then managed in-house by Nest.
Valuation risks
This could be a potential stumbling block for other master trusts. While they might be able to meet the cost requirements, not every master trust might be willing to take on the risk of managing valuations.
In practice, liquidity has been a relatively marginal concern for master trusts like Nest, which benefit from a much younger membership structure. Nest receives about £500m a month in cashflows from member contributions, which make liquidity a less pressing issue.
If anything, deployment of cash in private markets could become a bigger headache. Nest has committed to invest around 5% of its portfolio in infrastructure. Added to that comes the more recent backing of the Mansion House Pact, which will see Nest put aside 5% of its portfolio to private equity investment. The master trust currently sits on around £50m of dry powder and is keen to prevent further buildup, O’Neill says.
But with £500m in cash coming in monthly and the master trust expected to hit £100bn in assets by the end of the decade, the absolute size of Nest’s infrastructure allocation is set to rise to at least £5bn by 2030.
Not all of these assets are deployed with GLIL. Nest has appointed a number of infrastructure managers with others offering access to a more globally diversified portfolio and to the renewable energy sector, O’Neill says.
Room for growth
Frith sees potential for further collaboration with investors beyond the LGPS. “From where I sit, we are deploying capital of our existing members, including Nest, we still have some capital to deploy. But in the next six to 12 months, I would foresee that we will be opening the fund to new members. And I am very interested in talking to other master trusts,” he adds.
“To be honest, we’ve been relaxed about looking for new members because we haven’t needed the capital. This is in part due to the unique nature of private markets, where the deployment of capital can take time, and the fact that our members have had a lot of capital to deploy.”
Meanwhile, Nest also remains open to increasing its overall infrastructure allocation. “Our overall capacity for illiquidity could increase and when that happens, naturally our total exposure to infrastructure could increase as well,” O’Neill predicts.
