(Bloomberg) -- A newly created credit fund carved out jointly by two U.K. local government pension authorities plans to earmark almost half of its assets for investments in direct lending.
The Local Pensions Partnership, formed by pooling the funds of local government retirement funds in London and Lancashire County, will plow approximately 45 percent of its 1.3 billion pound ($1.7 billion) capital into direct lending, according to a person familiar with the matter, who is not authorized to speak publicly and asked not to be identified.
The credit fund's direct lending push is just one more example of efforts by pension funds in the U.K. to boost returns and meet their payout commitments in a low-yield environment. Public pension funds, mostly local government funds, now make up 32 percent of aggregate capital invested in private debt, which includes direct lending as well as mezzanine, special situations, distressed and venture debt, according to research firm Preqin.
“Local authorities are gradually reallocating their investments to direct lending funds,” said Symon Drake-Brockman, managing partner at Pemberton Capital Advisors LLP. “The opportunity wasn't there five years ago to do direct corporate loans," he said, adding five local authority pension funds had invested between 10 million pounds to 50 million pounds in his fund in the last two years, driven by the need to make a higher return on their investments.
A growing number of asset managers have started to provide loans directly to mid-market businesses as tougher regulations after the financial crisis crimp the ability of banks to extend finance. Direct lenders in Europe raised 11.4 billion euros from investors in the first six months of 2017, more than four times the amount raised in the first half of 2016, according to Deloitte.
The yield-seeking trend is no different in Britain. The number of U.K. public pension funds investing in private debt has risen to 49 as of October this year from 36 at the end of the same month in 2015, according to Preqin.
But some investors have raised their eyebrows about pension funds making a beeline for direct lending as it is perceived as riskier than other investments.
Gregory Peters, a senior portfolio manager at PGIM Fixed Income, an asset management arm of Prudential Financial Inc., said that he was concerned that U.K. pension funds had “over allocated” into direct lending, and that the “strong demand has created a proliferation of new startups and private funds which have created a frenzy for deal flow”.
Pension pooling
Local government pension authorities are rushing to direct lending to boost higher-yielding assets before the 89 local government pension funds in England and Wales form partnerships from April to pool their resources under new government reforms.
Currently larger U.K. local government pension plans are run in-house, and investment officers have varying levels of expertise in investing in private credit. Smaller plans hire external advisers to help them make investment decisions.
Dharmy Rai, an associate at BFinance, a financial services firm that advises pension funds and other investors, said that funds recognized that under the new pooling system alternative investment allocations like direct lending “may not be the first priority”.
This had driven some some local authorities to deploy capital in private debt this year as they wanted “to ensure that they can access the current investment opportunity now, rather than wait for plans to pool local pension funds next year,” she said.
To contact the reporter on this story: Áine Quinn in London at aquinn38@bloomberg.net.
To contact the editors responsible for this story: Sarah Husband at shusband@bloomberg.net, V. Ramakrishnan
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