NEST’s outsourcing strategy

When NEST was weighing up whether to outsource some of its private markets allocations, the decision was not straightforward.

NEST outsourced a multi-asset private credit mandate to BNP Paribas Asset Management in 2019 that gave it exposure to private debt instruments, including infrastructure, commercial real estate and UK, European and US loans.

Stephen O’Neil, head of private markets at NEST, says that, while outsourcing has advantages, such as operational efficiency, expertise and often lower fees, placing a multi-asset private credit mandate with an external manager also has its challenges. 

One is the loss of control over asset allocation. O’Neil says: “We as asset allocators have fewer levers to pull by outsourcing that whole chunk to an outside asset allocator.” 

He says it requires the outsourcer to strike a balance between controlling allocations to  sub-sectors on the one hand and operational and commercial efficiencies and added expertise on the other. 

To make the situation more straightforward, O’Neil decided to split out mandates for the running of its commercial real estate debt and infrastructure debt to Amundi and BlackRock.

He adds: “Infrastructure debt is also in the BNP fund. So if we particularly like infrastructure debt in one period, we can dial up the separate infrastructure debt mandate as well as allowing BNP to allocate to it as they see fit and picking up slightly different parts of the market through different mandates.”

O’Neil says that a fund manager that is building a multi-asset strategy would most likely argue that it can deliver higher returns. 

He says: “They can implement a dynamic asset allocation over time that adds value relative to a set-and-forget approach to the individual sub-asset classes. But from our point of view, when we invest in a multi-asset private credit solution, generally, we’re thinking more about the best way to crop the returns in the individual component parts.”

O’Neil explains that in most of NEST’s private market mandates, including in private credit, the master trust has the option to either reinvest or take distributions. “And in private credit, at least, our default position…. is that the managers will reinvest coupons and principal as they become due.” 

However, he emphasises: “We can flip the switch and ask them to make those distributions if we want to. If we wanted to dial down the allocation in a particular period a little bit, we’ll take some money out of it. 

He is keen to stress that NEST does not use the liquidity that comes through from private credit or any private market to pay out retirement benefits. 

“Our cash flow profile is that we are net positive by about £550m (€652m) to £600m per month. So if any member or any cohort of members want to take money out of the scheme… that money comes from cash flows at the scheme level, rather than having to dig right down and liquidate assets.”

Lauren Mills