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UK LGPS turn to private markets

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UK local government pension schemes (LGPS) are leading the charge on investment in private markets issuing tenders set to be worth billions of pounds in the coming years.

The most recent is the ACCESS Pool – a GBP35 billion partnership comprising the Cambridgeshire, East Sussex, Essex, Hampshire, Hertfordshire, Isle of Wight Council, Kent, Norfolk, West Northamptonshire Council, Suffolk and West Sussex County Council pension funds – which is seeking to appoint two private equity allocators.

it is anticipated that the aggregate size of the annual commitments will be worth GBP500 million or more on average each year. 

The ACCESS pool says that considering the potential ultimate scale of the mandate, it is anticipated that total assets across all vintages for both allocators could exceed GBP4-6 billion, based on potential asset growth and increases to individual authorities’ target allocations.

This marks the third phase of the ACCESS Pool’s private markets programme that has seen it steadily add private markets assets into its investable universe, most recently infrastructure and real estate.

The latest tender follows several issued by local authorities in the last six months, starting with the Wales Pension Partnership (WPP) – a collaboration of all eight of the country’s LGPS funds – which is developing a range of private real estate sub-funds.

The request for proposal includes UK and global real estate and local/impact real estate sub-funds. 

This was followed in December last year by three separate tenders for property managers from the West Sussex Pension Fund. The mandates are worth GBP40 million in total.

Also in December, two of the LGPS largest pension pools – the GBP60 billion Border to Coast and the GBP55 billion LGPS Central – announced multi-million-pound global real estate commitments.

The tenders will be music to the ears of incumbent Chancellor of the Exchequer Jeremy Hunt, who used the Autumn Statement to confirm that the government will go ahead with a proposal that the LGPS should aim to invest 10 per cent of its assets in private equity.

The government is keen to channel significant sums from the LGPS pools – which will be worth a projected GBP200 billion by 2040 – towards projects it believes will help realise its net zero and levelling up ambitions, and support UK business.

However, despite the flurry of real asset mandates, a large proportion of the LGPS schemes have expressed misgivings about government interference in their investment strategies. 

Following last year’s consultation on introducing 10 per cent targets to private equity, 84 per cent of LGPS respondents opposed the proposal, with some raising concerns about a potential conflict of fiduciary duty.

The tenders also run counter to comments made by the LGPS Advisory Board which argued that the strong funding levels across many public pension funds meant they were looking to reduce their exposure to risk.

“In any case many funds are now in a position where, due to strong funding levels and the desire of many employers to manage volatility in their future contribution levels, they wish to reduce their exposure to risk. That makes them very reluctant to increase their allocation to riskier asset classes, such as private equity,” the Board said. 

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