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LPFA selects four managers ahead of £150m alternative credit push

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The London Pensions Fund Authority (LPFA) has appointed four alternative credit managers to a framework agreement ahead of a £150m (€206m) push into the asset class.

The £4.8bn fund launched the framework tender last summer, with the process allowing all of the UK’s other local government pension schemes (LGPS) to consider the managers without launching a standalone tender.

It is the latest national framework agreement designed for the LGPS following a recent agreement covering legal advice and ones for custodian and investment consultancy services overseen by the Norfolk Pension Fund.  

The LPFA said its initial commitment to alternative credit would be worth up to £150m, with the strategies aiming to return 10-15%, with only minimal leveraging of the segregated account.

Beating 31 other applicants, the fund appointed Apollo Management International, Ares Management, Babson Capital and GSO Capital to the framework.

According to the LPFA’s most recent annual report, none of the companies ran any money for the fund in 2013-14.

It is understood the LPFA has yet to settle on which of the four managers to seed with capital but expects to complete the appointment by the end of March. 

The strategy will aim to invest in a range of high-yield debt, including distressed debt, trade finance, real estate debt, leveraged senior loans and mezzanine debt.

Additionally, the LPFA said the managers would be allowed to initiate a direct lending programme but also be required, for a portion of the mandate, to remain liquid enough so that it could be liquidated within a three-month timeframe.

In its Statement of Investment Principles, the LPFA said it regarded illiquid investments as holdings that could not be easily converted into cash within three years “without making LPFA a forced seller”.

The holdings would form part of the fund’s 30% benchmark allocation to illiquid assets, with a further 55% in liquid assets and the remaining 15% in total return holdings.

A recent report showed record interest in high-yield issuances, with law firm White & Case reporting European leveraged loan allocations of €116bn in 2014.

A number of UK and European investors have also pursued direct lending investments.

Recently, ATP, PensionDanmark and Danica committed DKK1bn (€134m) to an SME loan fund.

The UK’s Pension Protection Fund (PPF) last year said it was similarly considering a £150m allocation to direct lending.

For more on why local authorities have decided to push ahead with national framework agreements, read IPE’s interview with the Norfolk Pension Fund

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