NEST has allocated 5% of assets to private credit and announced its two fund managers for this area. Holly Roach looks at how the provider is leading the way for other schemes
Earlier this month, NEST revealed it had selected two fund managers it will use to invest in private credit, enabling its members to benefit from greater diversification of assets.
The government-backed auto-enrolment (AE) provider - which has eight million members - will be targeting around 5% in private credit, with an initial 12-month commitment of between £400m and £500m.
It has selected BlackRock and Amundi as its first managers in this asset class following a competitive tender process. While BlackRock will be responsible for global infrastructure debt, Amundi will have responsibility for global real estate debt.
NEST said investing in private markets would benefit members by providing a reliable source of income often at a lower level of risk than in public markets, as well as offering additional diversification benefits due to not being influenced by the same growth drivers as public markets.
Head of private markets Stephen O'Neill said: "Our new fund managers are already sourcing loans in their respective markets and we expect to begin deploying capital as soon as October. We'll be careful to manage our exposure to illiquids so that, while they'll play an important role in our portfolio, it won't be a dominant one."
The move to private credit follows a similar shift by number of other schemes, including the BT Pension Scheme and RBS Group Pension Fund.
Chief investment officer Mark Fawcett said 5% was a "reasonable target to start with" but noted NEST does have scope to increase it further in the future.
A driving force
Some industry members believe NEST might have now set a benchmark for other schemes to follow.
Lane Clark and Peacock (LCP) partner and head of defined contribution (DC) Laura Myers says she thinks "NEST is setting a new example on illiquids" and reveals "we will definitely see other schemes following suit".
She adds: "Illiquids are going to be a big thing in DC because we haven't been able to access these diversifiers before. Now these doors are beginning to open, I do think there will be a trend, particularly for the larger schemes."
While investment in private markets from UK schemes may grow, Aon head of DC investment advisory Chris Inman argues that in the future, "investment strategies we build will be far more unconstrained than they are today". He says: "NEST itself is not going to drive that; what's going to drive it is the economies of scale and innovation."
However, Myers says these investments often are "expensive, so that's a consideration for DC trustees particularly when there is a big drive on cost and transparency".
In terms of NEST, she says: "Its size and large contributions going in, and the fact it doesn't use a platform, makes it a little bit easier.
"Most DC schemes are on a platform and most platforms need daily dealing and daily pricing funds so they're not able to invest directly in the type of managers and the type of illiquids, particularly in private credit, that NEST has done."
However, she reveals the industry is "starting to see a little bit more flexibility in that" now.
Dean Wetton Advisory managing director Dean Wetton agrees that "NEST has a massive advantage in terms of its scale" over other schemes and says a lot of other schemes are "limited because they need a platform", unlike NEST.
He also says the cost of these investments is a drawback for a number of schemes, noting "it's really expensive stuff and so you can only put in a small slither" compared to NEST, which has "a £500m portfolio."
Inman argues the cost of investment in private credit in the short-term may disadvantage some schemes smaller than NEST but, in the longer term, more schemes will begin allocating to private credit.
BlackRock interim head of UK defined contribution Alex Cave said: "DC schemes have lagged behind in their adoption of this asset class. We believe alternative assets are no longer a nice-to-have but a need-to-have in a portfolio.
"Given their low correlation to equities and bonds, coupled with the benefits of providing diversification in a portfolio, alternatives can provide further protection against key risks such as rising inflation."
Wetton suggests: "The reason [NEST] has chosen infrastructure and real estate is because there is some security backing those, so they should be low risk."
He adds: "[NEST] could go further afield but then you would go further up the risk spectrum."
NEST also announced that it has applied to the Financial Conduct Authority to become a regulated investment firm and has created subsidiary company NEST Invest to assist it in securing co-investment in these asset classes.
Fawcett said: "NEST is going to be responsible for £450m new contributions every month. We're becoming one of the largest players in the UK pensions market and our investment strategy is evolving to reflect that."
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