Pension funds still have a few years to benefit from the current dislocation of the credit market, according to the head of investments at a £3.3bn (€4bn) UK local authority pension scheme.

Speaking with IPE magazine for a special report on credit in the May issue, Mark Lyon of East Riding Pension Fund said that, in 2010, he had initially predicted a 3-5 year period of banks retreating from lending, but now believed the retrenchment could last up to 10 years.

“Much of what we’ve done in alternatives has been about taking advantage of the dislocation in credit markets,” he said, noting that the fund had opted to invest in senior real estate debt, but also less commonplace asset classes such as aircraft leasing.

“While I wouldn’t class aircraft leasing as credit because the majority of our investments are in the equity part of the capital structure, the drivers of the return opportunity are very similar,” Lyon added.

“The banks are no longer there, so that has led to a bit of an outsized return, plus an illiquidity premium and a premium for being a less well-known asset class in the UK.”

Lyon, who prior to joining the local government sector worked in corporate finance at BDO Stoy Hayward, was unsure whether the fund would necessarily return to traditional risk-free fixed income allocations once markets normalised, noting that it depended on how much the normalisation diluted returns.

“If we go back to where we were in 2006-07, particularly in areas like corporate mezzanine debt – where I have some concerns already that the level of covenant-like deals and leverage ratios that are coming through – then it’s unlikely that a fund like ours would hang in there.”

For more on credit investment, see the special report in the May issue of IPE magazine