How a leading local government pension scheme (LGPS) fund uses private markets was revealed at portfolio institutional’s Private Markets Club Conference in March.
Euan Miller, managing director of the £20bn West Yorkshire Pension Fund, gave a good insight into the fund’s approach to private markets, which, he said, has developed and grown.
“The private markets portfolio has evolved over many years,” he said. “I see it today more about diversification than necessarily about higher returns.
“We try to be as direct as possible. So over time we have moved away from the funds-of-funds approach.”
When it comes to private equity, this is done on a pooled basis with West Yorkshire’s Northern LGPS pool partners in Greater Manchester and Merseyside. This has a co-investment sleeve in the region of $500m (£387m).
And with infrastructure, the Northern LGPS pool has worked with Local Pensions Partnership Investments (LPPI) to create an investment vehicle called GLIL. “So we take direct stakes in infrastructure assets. Rail-rolling stock and renewable energy are some examples,” Miller said.
Breaking the West Yorkshire portfolio down further, Miller revealed: “We have a relatively low allocation to private markets, at least in the context of a typical LGPS fund. It is broadly about 20%.”
The portfolio is made up of 5% in mainstream private equity, 5% in infrastructure equity, much of which is through GLIL, and 5.5% in credit. “But we don’t specifically allocate to listed credit or private credit, we tend to do whatever is most attractive at that point in time.
“We have tended to do private credit recently because credit spreads have been quite tight,” Miller said.
The fund also has a 5% allocation to real estate. “We have recently started building out a property portfolio,” Miller said.
Finally, the fund has a 5% allocation to what it calls alternatives. “Not all of this is private markets, we have some listed alternatives. It is a good mandate to align with the sustainable investment goals, and incorporate the local objectives in there,” Miller said.
He added that the fund is overweight its benchmark in mainstream private equity and infrastructure. “A byproduct of those asset classes having done very well,” Miller said. “We are below target weight in property, private credit and alternatives, and are building out in these areas.”
On the West Yorkshire methodology, Miller added: “We take a long-term approach. We are not trying to pick this asset class and say it is going to outperform another asset class over the short or medium term. Private market allocations are like supertankers, they are quite hard to turn around. So you can only nudge them up or down year-by-year.”
Miller revealed that West Yorkshire has done some small private equity and credit funds locally, but via the pool it is a different approach. “With the pool we have tended to do some bigger tickets with worldwide private equity managers,” Miller said. “One of the things with the LGPS pooling agenda is it needs compromise among investors. And everybody has things they like to do. But you have to meet in the middle somewhere,” he added.
On the flip side, the Greater Manchester Pension Fund has, for many years, held a 5% allocation to local investments. “We didn’t previously have an allocation at West Yorkshire. We now include it within the alternatives portfolio,” Miller said.
“What we may have lost in our local investment ability through private equity pooling, we should gain in working with Greater Manchester in other areas of local investments,” Miller said.
“They have done things like offer loans to build residential towers in the centre of Manchester. They do a lot of impact private equity funds and they also have a development property portfolio. Concluding, Miller said: “We are looking to do more local investment, but in a different way, is where we are heading.”
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