Nest is launching a search for asset managers to facilitate investment in unlisted infrastructure as it looks to boost diversification through its exposure to illiquid assets.
The provider is looking to invest across three areas, core, core plus and renewables, with a focus on assets with returns correlated to UK CPI.
Most of the allocation will go to core and core plus. Nest determines core as built assets with contracted revenues such as government-regulated monopolistic assets like water, which have a regulated and predictable rate of return. Core plus describes investments where there is an element of the asset manager engaging with the management of the asset, such as capital investment in developing and enhancing technology. Its renewables targets may include wind, solar and hydro, which tend to be linked to UK CPI through regulatory intervention.
Nest says it expects to take its allocation to private equity to 5 per cent, and would like to go to 10 per cent but says this is unfeasible because of the charge cap.
The procurement process will not start until early 2020.
Nest head of private markets Stephen O’Neill says: “This sort of investment barely exists in other DC schemes yet.
“It tends to come at a high price but we have sounded out dozens of fund managers and a core have said they can operate at our pricing. There won’t be any performance fees, the investment will be on TER basis. So asset managers will have to be innovative about their pricing stricture.
“This not about adding return juice to the equation. If we were able to clip total returns in the region of 6-12 per cent net we’d be comfortable. High single digit returns are what we might expect.
“We would like to go to 10 per cent, but it is unlikely the fee cap will allow us to do that. “The challenge to asset managers is do you want to have a small margin on a large and growing pie or stick to your margin and lose out on the growing DC master trust world. Because we are growing at the rate of £450m a month.”
