The LGPS Pool LPPI is working on a new Environment Opportunities Fund due to be launched early next year, pending regulatory approval. CIO Richard Tomlinson tells Mona Dohle why this fund is set to be different from its existing product range.
As the LGPS is evolving, so are some of the boundaries drafted at the beginning of pooling. While pools have used different approaches to merging their assets, one dominant idea across most pools was that asset allocation should remain in the hands of partner funds.
However, that boundary is beginning to be blurred as pools are beginning to launch their own thematic multi-asset strategies. Even though it is rarely acknowledged, this gradually transfers a degree of asset allocation power to the pool, particularly in private markets.
Cases in point are Border to Coast’s Climate-and UK Opportunities funds, which recently reported some £1.2bn and £500m of new commitments respectively. LPPI, the investment manager for the LPP Pool, which manages £26.3bn assets for the Lancashire County Council (LCC) and London Pensions Fund Authority (LPFA) is now cooking up its own response to the climate crisis, a new multi-asset Environment Opportunities Fund to be launched at the beginning of next year.
While it is still early days, the Private Markets Profile caught up with LPPI CIO Richard Tomlinson to find out how the new fund differs from its existing product range.
LPPI’s starting point was a growing desire to position itself for the investment opportunities arising from the global energy transition, Tomlinson argues. This was in large part driven by client demand, he emphasises: “Our clients were talking about climate solutions as part of their broader commitments to net zero. For asset owners who sign up to the IIGCC [Institutional Investor Group on Climate Change], there is a commitment to invest in climate solutions.”
But a holistic approach was nevertheless important: “We think very carefully about building a portfolio that fits their need, and we could see that something within that nexus of climate opportunities and environmental opportunities was both appealing to them and would be accretive to their portfolio.”
With the fund being in its early stages, LPPI is not yet disclosing a target size for the fund but Tomlinson hints that “it will be meaningful”.
Neither investing in private markets nor climate solutions are a new terrain to LPPI, which was fortunate enough to inherit significant private market capabilities from its founding partner funds and has been running infrastructure, private equity and credit strategies since inception. “We have been managing a very significant amount of money in private capital since 2016, this is just building on our existing extensive capabilities,” Tomlinson emphasises.
In terms of executing this strategy, we’ll be leaning on the whole LPPI platform, but the assets will be managed through a separate fund.
Building on experience
LPPI already has investments in energy infrastructure, most notably through the infrastructure platform GLIL. But the new fund will make use of a slightly different approach directly managed by the pool, leveraging its 70 people strong investment team, Tomlinson says. “In terms of executing this strategy, we’ll be leaning on the whole LPPI platform, but the assets will be managed through a separate fund.”
Ultimately, its mandate is designed for an open-ended fund structure which spans from fund- to co-investments to direct and indirect investments. “The initial focus will be on fund-based investments but as we have significant capability already, we will then look to make co-investments. Through time, I could see us doing more direct investments,” he predicts.
Evolving framework
The investment universe for the fund has been kept deliberately wide, in acknowledgement of the fact that the framework of what defines a climate solution has been evolving, Tomlinson explains. “We already have assets in our client portfolios that could potentially tick those boxes, from windfarms to battery storage.
“Building on these exposures, the key thing for us is the intention. What we currently have in our portfolio are investments with good ESG characteristics. With our new fund, there is a direct intentionality to invest in climate solutions. Obviously, the financial component is a big part of that but there is a subtle difference.”
“There are three key objectives to the fund: one is climate mitigation encompassing emissions reductions to support decarbonisation in line with a credible 1.5 degree pathway towards net zero. The second is climate adaptation, and the third is the protection and restoration of sustainable management of nature, biodiversity and ecosystems.”
With that in mind, the fund’s mandate has been set up as a multi-strategy private market offering with a broad asset universe, ranging from infrastructure and private equity to venture capital. “In reality, the bulk of it will be in either infrastructure or private equity.”
The fund’s mandate also encompasses private credit, though Tomlinson anticipates that exposure will be limited, as will venture capital. “Part of the reason for that is that we’re looking to invest in established technologies to drive those outcomes rather than nascent technologies. This leans more towards infrastructure and private equity.”
But this openness brings new challenges, he admits: “Being transparent, one of the challenges we face, if you asked me to build a credit fund, give me half an hour and I could write down a pretty sensible mandate, a specialist could probably do that in 10-15 minutes. It probably won’t change much in five years’ time. With this, simply defining the parameters of the mandate is actually quite difficult and could be quite different in five years’ time.”
Cautious outlook
While the fund’s asset allocation would suggest a higher return target, Tomlinson refuses to be pinned down to a precise figure, in line with his more cautiously optimistic outlook on private market returns. “It is an interesting question, is it possible to have your cake and eat it? To invest in what is right, deliver the additionality and have no sacrifice on the financial side? There is a strong argument that it could be but that shouldn’t be the base case.
“If you look at the risk return profile of the energy transition as a long-term thematic, there are very significant structural tailwinds to be investing into, that throws off significant opportunities. We do believe it is possible to meet investments that can meet those goals.”
When being pushed again if the fund could meet the double digit returns some private equity strategies have recently delivered, he carefully avoids any hard promises: “Things are changing, not only are the return profiles of the asset classes changing, the opportunity set is also evolving.
“We’re not creating this vehicle on the expectation of very significant excess return but we do believe that there is a healthy return we can generate over cash with an appropriate risk profile. You are rewarded for taking that long-dated view and taking the illiquidity. What we are absolutely not doing is chasing the highest level of return and risk,” he emphasises. In line with this philosophy, partner funds can expect to commit for 10 to 15 years.
Does this mean that they will see the fund through a potentially more difficult phase for private market? Not necessarily, Tomlinson argues. In the short term, he describes the fund’s approach to risk management as “solid underwriting, knowing what you own, proper due diligence” in keeping with what every private markets manager would argue.
But when it comes to the bigger picture, he remains cautiously optimistic: “It’s not obvious to me whether we are heading towards a more difficult phase for private assets. There are different dynamics now than there were 5-10 years ago but it is far from clear to me that the downside risks are significantly higher now. Risk is a function of valuation, what you pay for it and your risk of capital impairment. Are those risks significantly higher than they were five years ago? It’s not obvious to me,” he argues.
