U.K. Railworkers Pension Fund on Track for Private Debt Push

(Bloomberg) --

One of the U.K.'s largest pension funds, which oversees the retirement assets of 350,000 British railworkers, is betting on private credit to help preserve returns during the next downturn.

RPMI Railpen aims to boost its exposure to private debt to as much as 40% within a private investment strategy totaling 4.5 billion pounds ($5.5 billion) across two funds. While still a fraction of the scheme's 30 billion pound asset total, the value of one of the funds dedicated to private markets doubled to almost 1 billion pounds in 2018 from a year earlier.

“When the cycle turns, debt will be affected, but likely to a lesser degree than the equity piece, hence including the strategy in a wider private markets portfolio,” Andrea Ash, investment director at RPMI Railpen, said in an interview.

Institutional investors such as RPMI Railpen are pivoting toward private credit as they search for returns amid ultra-low interest rates and negative yields. A July survey of more than 550 European buy-side firms revealed that private debt would be among the most favored investment asset classes in the next three years, alongside private equity and infrastructure.

Church of England Favors Private Credit Over Stocks for Pension

Return Kicker

The railworker pension scheme's private debt push goes beyond direct lending by also targeting distressed and niche strategies such as credit risk transfers. The fund, which hired two investment directors for its in-house private markets team last November, is currently “below target” when it comes to private debt, according to Ash.

“In the distressed space, we're at the end of the cycle so you have to be careful as it's like trying to catch a falling knife on the way down, but you can generate a real return kicker on the way up,” Ash said.

The renewed hunt for yield among investors is helping drive a boom in fundraising, with global dry powder reaching an all-time high, according to law firm Akin Gump Strauss Hauer & Feld LLP. In the direct lending space, the flood of capital has intensified competition and led to higher leverage and weaker underwriting standards.

While quantity and quality of covenants and use of leverage are natural concerns for investors given the end of the cycle, “there remains a good case for having private credit in the portfolio,” Ash said.

To contact the reporter on this story: Marianna Aragao in London at mduartedeara@bloomberg.net

To contact the editors responsible for this story: Sarah Husband at shusband@bloomberg.net, Charles Daly

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