The North Yorkshire Pension Fund (NYPF) is to lend directly to small and medium-sized enterprises (SMEs) for the first time as part of a strategic “tweak” aimed at extracting more from its fixed income allocation.
The local government pension scheme tendered a £120m-130m (€163m-177m) private corporate debt mandate in connection with the decision to move into this area, which follows a review of its fixed income strategy.
The size of the mandate represents approximately 5% of the fund, the “relatively small” allocation the NYPF is aiming for initially, according to Tom Morrison, head of commercial and investments at North Yorkshire County Council.
Direct lending to SMEs was one of several illiquid credit opportunities the fund considered as part of an investigation into how it could “get more out of our fixed income allocation”, given unattractive prospects in corporate and government bonds.
“We were looking to see what else is around to complement our existing managers and mandates, and this seems to be the most sensible first step for us,” Morrison told IPE.
“The idea is to generate extra return for the fund without us having our eye on anything particularly risky”
Insurance-linked securities and bank capital release were other options the NYPF looked into during its fixed income review, which started nearly a year ago.
The scheme would like to concentrate its direct SME lending on the UK and Northern Europe, in part because “arrangements for organisations other than banks lending to SMEs” are relatively established there, according to Morrison.
“The idea is to generate extra return for the fund without us having our eye on anything particularly risky,” he said.
“We consider this to be a relatively safe first step into this area.”
He added, however, that the NYPF was mindful of the trend toward consolidation in the UK’s local government pension scheme (LGPS) system – “the LGPS investment landscape will look quite different in a few years”.
The £120m-130m the pension fund is looking to invest in private corporate debt could be awarded to more than one fund or manager, according to the tender.
The deadline for application is 17 February.
The NYPF would not be the first UK local government pension scheme to make SME lending investments by bypassing banks.
The Greater Manchester, Clwyd and South Yorkshire funds recently committed to a £60m SME development fund that will make private equity investments in businesses based in the North West of England.
The NYPF’s bond strategy review has also led to a shake-up of its liability-matching management, with the fund dropping Amundi to stick with one manager, M&G.
The divestment from Amundi reflects the fund’s decision to separate performance generation and liability matching more clearly, thereby folding the role of the latter into one manager that “genuinely performs that function”.
“That line,” Morrison said, “has probably been a bit blurred in the past, so we have simplified our arrangements and are looking to generate performance elsewhere.”
Amundi and M&G both managed to a UK Gilt benchmark, but while M&G manages UK government bonds for the fund, Amundi managed in a “completely different way”.
“They took advantage of a number of what I would describe as relatively esoteric opportunities that had the potential to add more value to the fund,” Morrison said.
Amundi’s recent performance has been satisfactory, and, overall, it has contributed significantly to the fund’s outperformance in the past, he added.
“It was more a decision about the strategic direction of the fund and the role liability-matching allocation should be playing,” he said.