The UK’s Environment Agency Pension Fund (EAPF) made its first co-investment last year as it explored new ways to drive down its overall costs.

The £3.3bn (€3.7bn) scheme invested alongside other firms – including private equity giant KKR – in Calvin Capital, a financing firm for smart meters. The UK government wants to roll out 53m smart meters, which monitor electricity usage, by 2020.

In its annual report for 2016-17, the EAPF said: “Despite a lot of demand from investors, we have found some good opportunities [in private markets], partly through focusing on partnerships and innovative structures.”

As well as the Calvin Capital investment, the scheme also participated in Standard Life’s European Club III property fund, targeting “high-quality commercial properties across Europe”.

Investment management costs rose year-on-year from £14.8m to £19.3m, the annual report showed. However, EAPF said it was “very conscious of costs and value for money”.

“Our strategy changes, which involve us investing more directly in illiquid markets, has also resulted in a higher overall fee as these assets are more expensive to invest in and our more direct approach means we must account for their fees explicitly,” the scheme added.

“To offset this, we continue to negotiate fee reductions or concessions with our managers. As part of this agenda we were pleased to make our first direct co-investment in our infrastructure mandate. Because co-investments are made directly they do not incur normal management fees and can be an effective way of reducing the high costs of investing in private markets.”

The new investments were funded through a reduction in EAPF’s equity allocation. The scheme sold £30m of UK equities and £25m of global equities.

In the 12 months to 31 March 2017, EAPF posted an investment return of 19.6%, helped by strong equity markets and the weak UK currency.

“The performance underlines the value of our unhedged equity approach: hedging the currency would have cost us over £100m in the year,” the scheme said.

Despite the “very strong” result, the scheme lagged its benchmark return. This was in part due to its long-term plan to reduce equity risk, which it said could mean its investment portfolio struggled to keep pace with its benchmark.

“Several managers take a benchmark agnostic, long term, and absolute return approach,” EAPF said. “Thus we expect the fund’s performance to lag in strongly rising markets, particularly when there is a focus on cheap stocks.”

However, EAPF emphasised that its focus on low-carbon and sustainable equity strategies had not negatively affected performance. “Our best performing managers were Generation and Impax, arguably our most sustainable,” the scheme said.

EAPF reported that its equity portfolio was 8.16% more “environmentally efficient” per £1m invested than a year earlier. For active bonds, the allocation was 4% more efficient.

Yesterday it emerged that CIO Mark Mansley and chief pensions officer Dawn Turner, who have established EAPF’s internationally recognised strategy, were to leave the scheme and take up senior positions at the Brunel Pensions Partnership. Brunel is the company set up to pool the investments of 10 local government pension schemes, including EAPF.