The growing scale of LGPS investment pools is creating new opportunities for strategic partnerships, co-investment and specialist expertise, although greater responsibilities are also creating fresh challenges.
The consolidation of Local Government Pension Scheme (LGPS) assets is changing the way investment pools approach private markets, with larger portfolios and growing internal capabilities allowing them to forge deeper relationships with asset managers and other institutional investors.
Speaking at the LGPS Private Markets Forum, hosted by Longview Networks sister-publication Room151, representatives from LGPS Central and Border to Coast described how their expanding scale is strengthening their negotiating position, broadening access to investment opportunities and allowing them to develop more sophisticated investment strategies.
Simon Edwards, senior portfolio manager – corporate alternatives at Border to Coast, said the increasing scale of the pools was transforming their capabilities.
“Having scale enables asset owners to do a great deal more internally,” he said. “Larger teams, specialist capability, better information, better use of information. We can see more of the market at any one time, underwrite more thoroughly, and ultimately we can negotiate better and form true partnerships with our general partners.”
Strategic relationships
Both pools are exploring strategic partnerships with external managers, although neither is rushing to establish relationships simply to secure lower fees.
Nadeem Hussain, head of private markets at LGPS Central, said the pool had established an internal working group to consider what it wanted from such arrangements.
“What’s important for us as we look at partnerships is – what value do they bring to the wider enterprise, as opposed to just on an investment basis?” he said.
Beyond fee discounts and access to co-investments, potential benefits include specialist research, operational expertise, staff training and support for senior management.
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Edwards said Border to Coast was similarly exploring partnerships that could provide access to sector specialists, priority co-investment opportunities, research teams and secondments, alongside preferential terms on future commitments.
The financial benefits of pooling are already becoming apparent. Edwards estimated that private markets fees had fallen by approximately 28–29% since 2019 relative to a benchmark, although the precise basis of the comparison was not specified.
Hussain pointed to LGPS Central’s expanding co-investment programme, which is now in its third vintage for private equity and approaching completion of its first infrastructure vintage.
“Certainly, on the co-investments that we’ve done to date, we’ve not been paying any fees,” he said.
The pool is also exploring alternative investment structures, including sidecar vehicles, to reduce the fee drag on portfolios.
Sharing expertise
Collaboration is also developing between pools and with specialist investment institutions, potentially allowing them to enter markets that would previously have been difficult to access.
Edwards described regular exchanges between LGPS pools, including manager references, operational due diligence and discussions about UK investment opportunities.
“It’s not about competition,” he said, adding that the pools were already sharing information and experiences across their investment teams.
Hussain suggested there were opportunities for collective negotiations over fees and contractual provisions, as well as exchanging knowledge about managers, administrators and investment opportunities.
The potential benefits extend beyond the LGPS itself. In a subsequent panel, Ian Connatty of the British Business Bank and Anna Shiel, chief investment officer at Better Society Capital, outlined how their organisations could help institutional investors access specialist markets, including venture capital and impact investing.
Hussain said LGPS Central was already drawing on their expertise, particularly in areas where it had historically invested relatively little including venture and impact investing.
However, collaborations need to demonstrate clear benefits to partner funds and their members. “We’re not just there as an additional source of capital in a particular solution,” he said. “That collaboration aspect has really got to prove its worth.”
Shiel emphasised the importance of combining the knowledge of different investors, particularly when assessing emerging managers and follow-on investments.
“The pooling of knowledge and insight and the ability to get on the phone to each other,” she said, was “invaluable”.
Greater responsibilities
The growing capabilities of the pools are being accompanied by substantial operational challenges, particularly as they assume responsibility for legacy private markets portfolios.
Hussain said LGPS Central’s private markets team had more than doubled from approximately 13 people a year earlier, with recruitment focused on experienced investors who had worked through difficult market cycles.
The transition of legacy investments also required careful management, particularly where the original investment decisions had been made years earlier.
“When you become stewards of these investments, it’s quite important to know why those decisions were taken,” he said.
Rather than routinely dispose of underperforming positions, the pool would seek routes to improve outcomes through engagement and other measures.
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The expansion of the pools’ responsibilities has also raised questions about governance, particularly where organisations are expected both to advise partner funds on asset allocation and implement their investment strategies.
Responding to an audience question about potential conflicts, Hussain said LGPS Central had established a separate advisory and allocation committee, with only one voting member shared with its investment committee.
The arrangement was intended to ensure that investment recommendations were independently challenged, recognising that specialist investment teams could naturally favour their own asset classes.
The challenge for the enlarged pools will be to demonstrate that their growing scale delivers better investment decisions alongside lower costs, while maintaining the independent scrutiny required by their partner funds.