What was the rationale behind Nest taking a 10% shareholding in IFM Investors?
It is pretty simple. About 17% of our assets are in private markets at the moment, and we have an ambition for that to be 30%. Given the growth in Nest’s assets under management, we have a lot of money to put to work and need strong partners to help us.
Private assets are interesting in terms of driving better member outcomes. That is why we are keen to get these assets into the portfolio. And IFM are a fabulous partner. In terms of alignment in motivation, they are owned by 16 Australian superfunds, so it is a good match.
This seems, as other asset owners have said to me, like a potentially game changing move for an asset owner. Is that how you see it?
It is massively exciting and, yes, game changing. This is the first time we have taken an equity stake in a fund management firm that is going to be deploying capital on our behalf. So I guess it shows this type of thing is possible.
It is going to give us a great ability to have better co-creation of new mandates, which hopefully will appeal to other UK defined contribution (DC) schemes. It is unlikely that our requirements are going to be that different to other DC schemes. Hopefully, it is game changing in the sense it will open up the market to other DC schemes.
So you see yourself as pioneers?
If you look at the pensions universe, we already are. I don’t think anyone else is doing anything in private markets like us.
Some have made various statements about what they would like to do, but I don’t think others have money deployed like we do.
You mentioned the motivation for greater private markets investment, but how did you conclude this was the move you should make?
It is fair to say it was a pretty lengthy process, as you would imagine, given the magnitude of what we were considering. Both sides had to be comfortable. Our governance [committee] and board needed to be comfortable. IFM’s shareholders needed to be comfortable about letting a Brit into the tent and not destabilise an arrangement that had been working well for them.
The whole motivation from our side was we need high quality, global players to get our capital to work. So the due diligence centred around our confidence in their ability to do that and their team, their record and on designing portfolios.
Those were all the things we were exploring. And given Nest’s approach to value for money, we are focused on costs. So that was another part of the conversation.
Was there any push back within Nest? Any scepticism or criticism, or was everyone in agreement?
As you would expect, governance groups ask questions, and as this was a private transaction there was a relatively small group of people working on it. There weren’t any pushbacks that I wouldn’t expect a high-quality governance group to ask.
The assurance bit was key: how confident were we that they would be able to deploy capital. How confident were we with their team and how confident were we on cost.
You said it was a lengthy process. How long did the agreement take from initial discussions to completion?
About 18 months. It was pretty long, but I was comfortable with that.
You mentioned this agreement is based on boosting your private markets investments. How will that work?
IFM’s DNA is infrastructure, and everything infrastructure related: so equity, credit and operating assets. We already have exposures in private credit, which covers infrastructure debt. We have renewables and infrastructure portfolios, which cover the equity side of things, and operating infrastructure assets.
We also have a private-equity portfolio. There are probably some interesting areas around the technologies associated with operating assets, that would fit nicely given they are higher growth and potentially slightly higher risk.
So we are looking all around the ecosystem. We think IFM will contribute a lot to the range of our portfolio allocation over the fullness of time.
Are you on target to fulfil your ambition to invest 30% of your portfolio in private markets by 2030?
We still have a lot of work to do. Quite a lot depends on the denominator effects: do equities keep on running? And does the employment market remain buoyant?
We are running to stand still because of the inflows we get, so [taking a shareholding in IFM] will set us well on the course, but we still have work to do.
You said this arrangement focuses on infrastructure, private debt and private equity. Why do you find these asset classes appealing?
Infrastructure and debt are closest to being funded. Private equity is where we see the greatest shortfall between our ambitions and our deployed capital. So that was an obvious place to explore other avenues to try and increase that exposure.
What are the attractions of private markets from an asset-owner perspective?
A few things make them interesting. One is you can get access to return streams from industries that are not available in public markets. So from a portfolio diversification and building higher expected returns perspective, they are interesting.
The second is you usually get paid a premium over what you would get in listed markets because you are taking on complexity risk and illiquidity risk. So the expected returns are higher.
Companies are also listing later in their life. So not only are the number of listed companies coming down, but those coming to market tend to be slightly more mature in their growth cycle. By investing through private markets you get access to those younger companies where the growth and returns are that bit higher.
I guess the final point is private markets tend to be more stable assets. Private equity is slightly different, but a lot of these assets, particularly infrastructure, have stable, predictable returns. That is helpful in a DC scheme. Having that predictability is super helpful.
There are good reasons why DB schemes and high-net-worth individuals have been using these assets in their portfolios for some time.
So you are looking to benefit from companies staying private for longer?
Exactly. A lot of technologies associated with the net-zero transition are difficult things for public markets to invest in, because the timing to generate a profit is quite a long way out. Generally, public markets struggle with that.
You mentioned net zero, how are things on this front given that the Net Zero Asset Managers (NZAM) group has suspended its activities. Does that leave asset owners in no man’s land?
We are still committed to our targets. And all our asset managers have committed to the targets we have set for them. Organisations are maybe pulling back from their public pronouncements for business reasons. One can take different views on whether that is appropriate or not.
But at the mandate level, we have been getting reassurances that the asset manager teams will continue to engage and push companies for the changes we are interested in. That is part of our monitoring: making sure they are not rowing back on what they are doing on the ground.
It must have been disappointing that the NZAM initiative was suspended, given the big hitting asset managers that withdrew.
One of the challenges of talking to corporates is they get 100 letters from investors asking for slightly different things. That is complex for them to manage.
The best companies will be doing this anyway but it is potentially a huge drain on resources. For some of those companies who are more marginal on this journey, there is a risk they are not getting a clear and consistent message, which is one of the great virtues of these collaborative investor initiatives. It is going to make it more difficult for those companies to see a clear path forward.
Are you still committed to your targets and the net-zero investor organisations you are a member of?
Yes. We haven’t changed. We certainly haven’t moved our targets.
Are you speaking to the government about these developments?
That is generally not something we speak about in public. The government needs to set a clear agenda, clear expectations and clear targets. That makes the job so much easier for investors. If everyone knows what the rules of the game are everyone can align behind them. It isn’t helpful when the targets are not clear or are shifting.
Is the government doing that?
If you look around the world there are those re-evaluating the feasibility of some of this. There is no point having a target that is unattainable. That is not helpful to anyone. It needs to be realistic, otherwise it loses credibility.
Given what is happening, has the ESG debate become more sceptical and, therefore, more realistic?
It is helpful that investors are thinking long and hard about what they are doing and not making statements in public that they cannot follow through on. People are going back to that principle and checking that they can deliver on their targets. That is a healthy development in the industry.
Back to IFM, is taking a shareholding in an asset manager a move you would recommend to other asset owners?
You need to be of a certain scale to be able to do it. Nest’s scale means we were able to do it. But the general principle of partnership with your managers is one of our investment beliefs, in that by having partnerships with our managers we deliver better outcomes. And being shareholders you are more aligned with your manager.
What size then do you need to be to consider this an option?
It depends on the size of the organisation you are talking to. So there is not an answer to that. It probably has much to do with the size of the executive team and the sophistication of the governance to be able to evaluate these opportunities.
Do you have any similar projects planned?
We don’t. But it is fair to say the IFM announcement has led to a flurry of emails asking: “What about us?”
Is taking a share in an asset manager an acceptance that some asset managers have failed to deliver in the way you wish, therefore you are trying to shape an asset manager?
No. In this situation it is very much that they are a like-minded partner. We are definitely not looking to fix them. We are looking to take advantage of their skill and talent as leaders in the infrastructure world.
LIZ FERNANDO’S CV
May 2023 – present
Chief investment officer
Nest
December 2021 – May 2023
Deputy investment officer
Nest
November 2020 – December 2021
Head of long-term investment strategy
Nest
August 2012 – September 2020
Head of equities
Universities Superannuation Scheme
January 2006 – August 2012
Deputy chief investment officer, head of European equities
Universities Superannuation Scheme
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