Ahead of Room151’s LGPS North conference in Manchester, the director of pensions at Merseyside Pension Fund discusses the potential impact of the government’s Edinburgh Reforms.
Investing in illiquid assets, such as private equity and infrastructure, has become an important part of Local Government Pension Scheme (LGPS) funds’ portfolios over recent years as it unlocks access to sectors, industries or strategies that aren’t available through liquid or public markets.
However, Peter Wallach, director of pensions at Merseyside Pension Fund, told Room151 that there may be “misconceptions” about investing in illiquid assets, such as venture capital, and there is not always enough information about the associated opportunities and risks. He argues that the government’s Edinburgh Reforms could be a way to “harness” those opportunities “in a pragmatic way”.
Late last year, chancellor Jeremy Hunt announced plans for a wide-reaching review of the UK financial services sector in his Edinburgh Reforms. He confirmed that the government will consult on “requiring LGPS funds to ensure they are considering investment opportunities in illiquid assets such as venture and growth capital”.
Wallach said: “The Edinburgh Reforms are more about making pension funds look to [illiquid assets], but that there’s no mandate or compulsion for pension funds to invest in venture capital or growth capital.”
He detailed that the reforms will “encourage” pension funds to look towards investing in growth capital. “It is important for the UK as a nation that there is capital committed to growth – we need the economy to grow. We need to take advantage of the research and technology opportunities we have.”
Wallach will be discussing investment in illiquid assets at Room151’s LGPS North conference in Manchester on 27 April 2023.
One way of making more direct impact is through illiquid assets because you can be more precise about the impact that you’re looking for.
Providing ‘greater certainty’ over returns
Wallach highlighted that there is currently a “great deal of uncertainty about returns, losses are not uncommon but also potential opportunities of very substantial returns” from investment in venture capital.
He added: “If the government or someone else could find a way of giving some greater certainty about the extent of potential capital losses – such as providing first loss capital or putting a floor under losses to investors and, as a quid quo pro, capping the upside – that might be more attractive to a fund like ourselves, potentially.”
Currently, Merseyside has invested in multiple types of illiquid assets including private equity (which makes up 10% of the fund), infrastructure, private credit and property. The £10bn fund is part of the Northern LGPS pool and has around 140,000 members.
If the government or someone else could find a way of giving some greater certainty about the extent of potential capital losses – such as providing first loss capital or putting a floor under losses to investors and, as a quid quo pro, capping the upside – that might be more attractive to a fund like ourselves, potentially.
Impact investing
Wallach also highlighted that illiquid assets present opportunities to pension funds with a growing interest in impact investing. He said: “One way of making more direct impact is through illiquid assets because you can be more precise about the impact that you’re looking for.”
Therefore, he detailed that investments in illiquid assets can play a role in generating beneficial social and environmental impact alongside financial returns. Wallach highlighted that a key example of this is Merseyside’s investment in infrastructure assets.
“We are funding the construction of a district heat network in Liverpool Waters supplying commercial and residential clients, whilst delivering environmental benefits such as saving an estimated 4,200 tonnes of carbon per year. We have a variety of investments in renewable energy including a co-investment in six Portuguese hydroelectric dams which generate electricity and help address the intermittency issues that beset wind and solar projects.
“There are also ways of managing your private credit so that you provide capital to businesses that are doing the ‘right things’ and, potentially, deny capital to businesses that aren’t [Paris] aligned. That can hold true for private equity,” Wallach added.
Peter Wallach will be speaking at Room151’s LGPS North conference on 27 April 2023 in Manchester. The conference will also offer insights into long-term asset allocation and local investing.
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