The UK’s £7bn (€9bn) Pensions Trust has turned to private debt for the first time, having in January made a £125 commitment to the illiquid asset class in a bid to obtain an “attractive risk-adjusted return”.
The commitment marks the multi-employer pension fund’s first foray into private debt as it no had allocation to the asset class before then, according to David Adkins, CIO at The Pensions Trust.
It hopes to take advantage of a gap created by banks scaling back their lending to mid-sized companies as a result of capital and leverage regulations.
A similar risk/return motivation was behind the North Yorkshire Pension Fund’s recent decision to move into direct lending for the first time, too.
Other recent private debt moves by European pension funds include a tender from Fondo Priamo, Italy’s second-pillar pension fund for public transport sector employees, and an unnamed fund using IPE Quest.
At The Pensions Trust, private debt will sit alongside other illiquid assets in which it is invested, including UK property and European unlisted infrastructure, according to Adkins.
The Pensions Trust also invests in illiquid assets to gain exposure to long-dated, inflation-linked cashflows and better match its liabilities, and has set up an Inflation Linked Growth Fund to do this.
Illiquid assets cannot represent more than 20% of total assets under the pension fund’s current policy.
The £125m allocation to private debt represents around 2% of its main portfolio.
No information was provided about the manager or funds the pension fund is using.
Consultancy bfinance estimates the total size of the private debt market to be €5.4trn, with banks still contributing some 78% of financing despite their retreat from the credit markets following the 2008 financial crisis.
Institutional investors are looking to make further allocations to the asset class this year, as they are still at or below target allocations, the consultants previously noted.
The UK is the key market for direct-lending dealflow, accounting for almost half, followed by France and Germany, according to bfinance.
This is to a large extent a function of the lender-friendliness of the legal framework for bankruptcies and foreclosures.