NEST joined the Mansion House Compact in July 2023 as one of the first signatories, committing to allocating at least 5% of its default funds to unlisted equities by 2030.

Stephen O’Neill, head of private markets, spoke to IPE about NEST’s private markets journey and how it has already reached the compact’s goal. 

For UK workplace pension scheme NEST, its private equity journey started back in 2017, when it reached the scale to start investing in private credit.

Stephen O’Neill, head of private markets, said that at the time NEST had enough assets under management (AUM) to start negotiating the fees it could afford.

Around the same time the government and the Treasury had asked the defined contribution (DC) and investment industry to “put their heads together and work out how [bring down] some of the barriers to investing in private markets and specifically private equity”.

O’Neill said that NEST had been approached by general partners (GPs) and fund managers in the venture capital space but those conversations were “a little bit stilted” and nothing came out of those discussions after GPs and fund managers decided it was “too difficult” and “maybe not for us”.

From there, NEST continued its research into private credit, ran a manager search and after the selection process appointed three private credit managers.

He said: “That built a little bit of momentum internally to try and keep plugging away at this problem. If we can do credit, maybe we can do infrastructure.”

The noise it sent to the wider private markets industry was that NEST and UK DC schemes were serious about trying to invest in these asset classes, O’Neill said, adding that it created a lot of interest in people approaching the master trust with various ideas, “some good and some not so good”.

Stephen O'Neill

Stephen O’Neill at NEST

By 2021, NEST appointed three infrastructure managers, but O’Neill said he was still sceptical whether NEST would ever manage to bring private equity to the table.

He said that “given that fees are so sticky, and given that private equity firms tend to be well oversubscribed,” private equity firms were “not necessarily crying out for […] new sources of capital” and certainly not with lower fees than they’d charged before.

This is where NEST decided to consider the co-investment route to bring overall fees down, O’Neill said. He noted, however, that at the time the challenge was that blended fees would still be too high, and the DC charge cap at the time was amenable to the performance fee structure, which NEST was determined it did not like or need.

NEST then considered doing co-investment only, with no commitment to a primary fund that has a closed-ended structure, performance fees and high management fees.

“We’ve invited managers to bid for solutions that either were more conventional but had much lower fees, or more realistically to come to us with a co-invest only structure where it was a flat and fairly low management fee with no performance fees,” he explained.

He said that in 2022 NEST appointed Schroders to help it invest in private equity.

Today, NEST is the only signatory of the Mansion House Compact to be close to reaching the target of 5% investment in private equity. Currently, its private market allocations, including real estate equity sit at nearly 20%.

O’Neill disclosed that NEST trustees have an appetite to go up to as high as 30%.

But why join the compact if NEST already exceeds its targets? O’Neill said the compact’s ambition is to get more private markets players and fund managers to think about working with DC schemes.

And it also sends them a signal that DC pension funds are open for business, he said, which “can only be beneficial to us and the industry more broadly”.

“We signed the compact because we were already doing what the compact was asking us to do so. There’s no harm in us signing up for this; it didn’t change our strategy, but it helps to bolster that signal that we as an industry, collectively – both asset owners and asset managers – should think through the challenges and try and work through them together,” he continued.

In terms of its wider portfolio, O’Neill said NEST already has a very considerable allocation to investment grade and high yield bonds as well as emerging market equities and developed market equities: “We have almost all of the major asset classes in our book.”

He added that NEST is in the final stages of appointing timberland managers and continues to undertake research in agriculture, which is “more complicated than timberland from a natural capital point of view”.

The fund is also considering making very select investments in infrastructure and renewable infrastructure, particularly in emerging markets for the first time.

On the public side, it has recently appointed Lombard Odier Investment Managers for its thematic equity fund.

He said: “The work never stops. We’re constantly adding new mandates and new asset classes.”

Mansion House Compact explained

The Mansion House Compact is a commitment announced by the UK chancellor Jeremy Hunt in his keynote policy speech at the Mansion House on 10 July which calls on DC pension schemes to boost investment in UK unlisted equities.

As part of the compact, its signatories are expected to allocate at least 5% of their default funds to unlisted equities by 2030.

Currently, the DC schemes’ investment in UK unlisted equities is under 1%.

According to the chancellor, if the UK’s DC market follows suit, this could unlock up to £50bn of investment into high-growth companies by that time.

The initial signatories of the compact included Aviva, Scottish Widows, Legal & General, Aegon, Phoenix, NEST, Smart Pension, M&G and Mercer.

Since then, Aon and Cushon joined as signatories of the compact.

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