For some pension funds, investing in private markets is still part of an on-going debate. But for the £7bn master trust Smart Pension, private markets are central to its investment portfolio.
“We don’t want to cut out a massive part of the investment market in the UK and across the world. We are super pro-private markets, if it is done and structured in the right way. And that is how we going to expand going forward,” said James Lawrence, director of investment proposition at Smart Pension, at the March portfolio institutional private markets event.
And the 10-year-old Smart Pension started investing in private debt back in 2021, making it one of the first master trusts to do so, with its MV Dual Credit fund. “That gives us great returns. And it gives us great access to companies we otherwise would not be able to buy debt off in a public market,” Lawrence said.
When looking at the benefits of private markets, Lawrence said: “The obvious one is return.” Although he also added: “Private debt is not without its issues, with refinance rules and hidden volatility. But the returns have been really strong and stable, to quote Teresa May.”
He also listed other benefits. “We think the member angle is really underrated in terms of the engagement we can get. We have invested into a listed biodiversity fund and found some really strong engagement from that. And is helps with the government agenda as well.”
In line with this proactivity to private markets, Smart Pension was an early signatory to the Mansion House Compact. “[Invest in private markets] was something we were going to do anyway,” Lawrence said. “So it was quite handy to be part of a movement and momentum to boost private markets in the UK.”
But he then added: “Mansion House 2.0 is quite contentious.” The particular controversial points of Mansion House 2.0 for Lawrence are the usual suspects.
“The mandation is super contentious. The piece around UK investment is also quite contentious. That is going to be a difficult pill to swallow,” he said.
“Once you start directing geographically where to invest you are struggling,” he added. “We are all for large investments into private markets, and large investments into the UK, but mandation, and where that goes, is very tricky.”
Looking at the Smart Pension portfolio overall, 6% is in private debt, and the pension fund has had that for four years. The ambition is to shift the allocation to 15%.
“That is the top end of the market for a commercial DC master trust,” Lawrence said. “And that is going to be split across private debt, renewable infrastructure and private equity, including venture. We are going to change the dynamic of private debt as well and move it more towards impact debt, which is a very nascent area,” he added.
Smart Pension is going to go down the renewable infrastructure rout. “Long term that is 100% the right thing to be doing regardless of political and regulatory bumps in the road. That is super exciting for us and building for the future,” Lawrence added.
This will include investments in companies who are producing “concrete of the future” and creating towns that are completely net zero. “Those really out there ideas for investments,” Lawrence said.
And the final piece is the private equity. “That is going to be done properly, we are going to have some venture capital in the portfolio, and then include [investments] across the private equity spectrum, funding smaller companies of the future,” Lawrence said.
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