NEST is challenging the asset management sector to come up with an affordable and innovative private credit solution for itself and the wider defined contribution (DC) sector.
On 5 September, the master trust issued a new mandate tender to incorporate private credit into its evolving investment strategy in a cost-effective way.
The master trust believes that its members should be able to benefit from the higher returns available from private credit. It sees long-term potential in private markets and alternative asset classes, and recently started investing in commodities through its first segregated mandate.
While private credit has been very popular among defined benefit (DB) schemes as they seek to find alternative sources of return, this asset class has not been adopted by DC funds.
This is because private credit has been seen as too costly and illiquid for DC, due to a combination of the default fund charge cap and daily dealing requirements.
However, NEST said that after extensive research and analysis, it believes that it can be done in DC if there is innovation by asset managers. It is challenging the industry to come up with appropriate solutions and deliver them at an affordable price for the new ‘DC generation'.
The master trust's chief investment officer Mark Fawcett said:
"Developed market equities and bonds are looking fairly fully valued. With volatility on the rise, we must find cost-effective ways to access alternative sources of return and diversify risk for our members."
"We don't buy the argument that private credit is out of reach for DC schemes," he added. "Our members should have access to the same opportunities as pension savers in large, sophisticated DB schemes.
"DC pension savings are soon going to dominate the market and fund managers are beginning to recognise this. They'll need to think creatively about what this new generation of savers requires and be willing to negotiate seriously on fees.
"We're looking to work with innovative fund managers who see the future potential in this market and want constructive, long-term relationships with their clients based on pension savers' best interests."
Instead of the traditional model of small closed-ended funds, NEST is looking for managers that can operate evergreen, scalable funds focusing on unlisted infrastructure debt, real estate debt and corporate loans. The master trust is welcoming innovative ideas about how to access these markets either independently or in a multi-asset solution.
Looking forward, it said it expects to accrue enough assets under management to explore direct and co-investment opportunities, and wants to work with managers with the "experience and motivation to support NEST" in developing its in-house expertise in this area.
Newton’s Curt Custard considers the investment outlook for 2021 and the implications for DC schemes
Master trusts’ investment strategies have grown and become more sophisticated over the last three years, but “growing pains” are hindering progress, according to the Defined Contribution Investment Forum (DCIF).
The government will set up an infrastructure bank to support investment and to co-invest alongside investors including pension funds.
The Retail Prices Index (RPI) will be reformed and aligned with the housing cost-based version of the Consumer Prices Index, known as CPIH, by 2030, the Treasury has confirmed.
Estatee agent denies a shareholder’s absence from voting is an issue, finds Minerva Analytics.