Nest is broadening the range of assets within its target date default funds with an investment of up to £500m in illiquid private credit and has applied to the FCA to create a subsidiary to support direct private market investing.
Amundi and BlackRock have been selected by Nest after an open tender in which nearly 40 organisations applied. Nest will use BlackRock’s global infrastructure debt and Amundi for global real estate debt.
Private credit investments are not traded on a public exchange or market but are usually directly negotiated loans between an investor (or small group of investors) and the loan’s recipient. Investors negotiate bespoke rates but are expected to tie up their money until the loan matures, for which they are normally rewarded with better returns – known as an ‘illiquidity premium’.
Nest says private debt can be areliable source of income at often a lower level of risk than is found in equivalent public markets, that also gives it more control over ESG attributes of investments. Private debt is also not correlated by the same growth drivers as public markets.
Nest will initially target about 5 per cent in private credit but will drip-feed money into the market to avoid pushing up prices. Nest chief investment officer Mark Fawcett says many Australian Super fund have between 30 and 40 per cent illiquid investments, and expects Nest’s stake to increase beyond 5 per cent over the long term.
Nest says investments in illiquid assets will initially be focused around investors pre-age 55, reducing the complexity of pricing assets for investors looking to withdraw their funds in periods when illiquids are proving hard to sell. It says its arrangement with Amundi and BlackRock includes the flexibility to increase valuations beyond quarterly or monthly in times of challenging markets, to avoid departing members gaming the system.
No performance fees are involved and the mandate does not include a requirement to tilt investments towards the UK.
Speaking at a launch event in London yesterday, both Amundi and BlackRock said most other master trusts had been having conversations with them about investing in illiquids, but that Nest was considerably further down the line than all the others in terms of its thinking around private debt.
Nest has also created a subsidiary company which has applied to the FCA for authorisation as a regulated investment firm to enable it to secure co-investments in private markets.
The subsidiary, called Nest Invest, is seeking authorisation to become an FCA regulated Occupational Pension Scheme (OPS) firm. OPS firms undertake investment management on behalf of a trustee or pension scheme and have the ability to manage more complex investment decisions and tasks in-house.
This move follows in the footsteps of a number of other large UK pension schemes, including RBS and BT, which have also created OPS firms.
Nest Invest will allow Nest to implement more sophisticated ways of investing on behalf of its members, some of which require specific FCA regulation. These additional investment activities includeproviding regulated advice to Nest’s Board on new investment opportunities, and directing fund managers to use derivatives in order to help invest cashflows and manager risk efficiently.
The FCA is expected to respond to Nest Invest’s submission later this year.
Nest head of private markets Stephen O’Neill says:“Today Nest is taking a significant step in increasing the investment opportunities for our members and following the example of leading DC schemes overseas by moving into private markets.
“Nest’s size and future growth helps negotiate great deals with fund managers, meaning our members can grasp with both hands the opportunities presented by private credit.
“We’re long-term investors – our youngest member is just 16 and she could be investing with us for more than 50 years. She’s the perfect person to be entering into private markets. We can be patient with her investments so she’ll benefit from the illiquidity premium you get with these types of loans. “Our new fund managers are already sourcing loans in their respective markets and we expect to begin deploying capital as soon as October.
“We’ll be careful to manage our exposure to illiquids so that while they’ll play an important role in our portfolio, it won’t be a dominant one. Our positive cash-flows will ensure members retain the ability to move their savings around.”
BlackRock managing director, head of European infrastructure debt Jonathan Stevens said: “When investments go wrong, infrastructure debt doesn’t go wrong for the same reasons. So it adds stability to an investment portfolio.”
Nest chief investment officer Mark Fawcett said: “Nest is going to be responsible for £450 million new contributions every month. We’re becoming one of the largest players in the UK pension’s market and our investment strategy is evolving to reflect that.
“While setting up Nest Invest is an exciting development, it’s the natural next step for a scheme of our size. We already have the internal expertise in Nest’s investment team to manage the additional responsibilities.”
BlackRock interim head of UK DC Alex Cave says: “For many years, UK DB pension schemes have been aware and taken advantage of the potential benefits offered by investing in alternative assets. Yet DC schemes have lagged behind in their adoption of this asset class. We believe alternative assets are no longer a nice-to-have but a need-to-have in a portfolio. Given their low correlation to equities and bonds, coupled with the benefit of providing diversification in a portfolio, alternatives can provide further protection against key risks such as rising inflation.
“Our bespoke fund solution, the BlackRock GBP Infrastructure Debt LP, is BlackRock’s first sterling-based infrastructure debt fund and tailored to meet the specific needs of UK DC pension fund investors such as Nest. The Fund invests in infrastructure debt assets in the UK and abroad and covers a range of sectors including, wind, solar, transportation, social infrastructure, social housing and digital infrastructure.
“Nest is an organisation pivotal to the growth and success of the UK DC market and we are excited to partner with them by providing their members access to this important asset class. As Nest continues to lead the charge in bringing innovative investment solutions to members, we look forward to continuing to work with them on this mandate and on the evolution of their investment offering built for a new generation of DC savers.”