Private markets offer LGPS funds opportunities for targeted investments in local businesses and emerging technology that public markets can’t offer, argues Alex Bull, head of pension fund management and investment at Greater Gwent (Torfaen) Pension Fund, as interviewed by Room151’s Aysha Gilmore.
When the majority of Local Government Pension Scheme (LGPS) investors first ventured into private markets, their primary goal was portfolio diversification. However, despite improved funding ratios, LGPS funds continue to allocate to private markets. This is because, in addition to portfolio diversification benefits, private market allocations are also often seen as an ideal vehicle for addressing responsible investment targets.
This is particularly true for the Greater Gwent (Torfaen) Pension Fund, which first allocated to private markets as a means of achieving diversified growth within its portfolio to improve its funding position, which is now at 97%.
An investment strategy review in 2019 determined the need for a “change of direction” on investing in unlisted assets. With investing into more sustainable and UK-focused projects being a primary driver of the allocation in a more recent review in 2023, explains Alex Bull, head of pension fund management and investment at Greater Gwent (Torfaen) Pension Fund.
Since the 2019 strategy review, the Welsh pension fund has set a commitment to invest 30% of the fund into private markets, switching its traditionally “equity dominated allocation” to real estate, infrastructure and private credit, Bull states.
“Some of this is in part driven by our responsible investment, sustainability agenda and how we’re thinking about investment in UK growth.
“There is also the belief that private markets offer attractive risk-adjusted, often inflation linked returns over a long-term basis which makes them suitable for the LGPS and its objectives.
“We are having some conversations on the private credit side about opportunities in Wales but the potential we see is in infrastructure and real estate at the moment,” he tells Room151.
Investing in the ‘energy jigsaw’
Bull explains that Greater Gwent Pension Fund, which has £4.2bn of assets under management, has not yet set a net zero target for its portfolio investments, but the fund is looking into establishing a decarbonisation framework.
Despite this, the fund has made investments into the energy transition, with Greater Gwent making a £50m allocation to the Quinbrook Renewables Impact Fund in partnership with its pool, Wales Pension Partnership, which also committed £17m.
Alongside this investment, Greater Gwent has also committed to the Gresham House British Strategic Infrastructure Fund I and II (“BSIF”) and Capital Dynamics’ “Project Zero”, which is a number of onshore wind projects throughout Wales.
Bull highlights that Greater Gwent committed to these funds due to their UK and renewable energy focus: “It has some traditional assets and other assets in what we call ‘the energy jigsaw’, such as renewable energy generation, energy storage, grid stabilisation and renewables optimisation.
“We have invested in traditional solutions as well as some slightly more nascent technology, building the solutions for the future. So, that was attractive and consistent with the risk-return appetite that we have.”
Quinbrook and Capital Dynamics’ funds also have assets throughout Wales and within Greater Gwent’s geographical footprint, Bull explains, with renewable energy projects in Newport and Blaenau Gwent, with others across North Wales in the pipeline.
Greater Gwent’s investments in the Quinbrook Renewables Impact Fund, Gresham House’s funds and Capital Dynamics “Project Zero” came before its announcement of a three-year strategy to “level up” its investment approach within the UK, targeting an estimated 6% allocation to infrastructure and real estate respectively over its period.
A strategy in line with the previous government’s ambition for LGPS funds to allocate up to 5% to projects which support local areas in the UK. It will target investment of up to 2% (£80m) of its total portfolio per annum over the next three years to each asset class.
Bull highlights that some of the commitments in the strategy have been done outside of WPP, particularly the smaller ones, “layering investments over and above the pool”.
“We’ve invested in a couple of different opportunities where the total fundraise is typically as small as £70m or £600m. So, smaller portfolio companies or platform businesses focusing on a range of solutions to environmental and social challenges such as sustainable food, which is an interesting emerging technology like vertical farming,” Bull says.
The unintended consequences of scale are that you could inadvertently end up overlooking some of the smaller opportunities in the market that are solutions for the future, particularly in the UK.
Alex Bull, Greater Gwent (Torfaen) Pension Fund
Impact of scale
Greater Gwent is also looking at small investment opportunities in digital inclusion, natural capital such as forestry and offsetting as part of the strategy, Bull adds. However, he argues that with greater LGPS pooling consolidation, these smaller opportunities could be lost.
“The unintended consequence of scale are you could inadvertently end up overlooking some of these smaller opportunities in the market, that are solutions for the future, particularly in the UK with some of the underlying platform businesses. These are small, entrepreneurial type, highly innovative ideas that need time to scale up, they don’t need £500m of investment today, they need £50m.
“However, over time, LGPS funds investing in these types of opportunities can become a catalyst for their respective pools to follow suit. LGPS funds can be the early movers,” Bull adds.
With the UK general election coming up, both the Labour and Conservative parties are pushing for LGPS fund and pooling consolidation. In his Mansion House speech last year, chancellor Jeremy Hunt hinted at plans to set the minimum asset size for LGPS pools to £50bn. It is unclear whether Labour will continue with this plan if elected.
Currently, Greater Gwent has pooled 74% if its fund. Bull argues that there are “many merits” from scale, collaboration and efficiencies that can be generated from greater pooling consolidation, with the fund being fully supportive of pooling, but a “balance needs to be struck”.
“What I’m thinking about as an LGPS investor is trying to make sure we get the blend right, clearly the focus is on pooling and building on all of the benefits this provides but we also need to take advantage of smaller credible opportunities as a fund that enable us to achieve our own broad objectives,” he adds.
