UK asset owners
step up search for
income in alternatives

UK institutional investors showed an increased appetite for income-generating alternative asset classes last year amid an ultra-low and negative interest rate environment.

The sharper focus on income generation saw property, infrastructure and private debt account for more than 71 per cent of all planned and executed investments in alternative assets last year (to November 19 2020), up from 64.2 per cent during the previous 12-month period.

Infrastructure was the most sought-after alternative sub-asset class, representing almost a third of all expressions of interest* and investments** in non-traditional assets recorded by MandateWire in the UK last year.

Local authority pension schemes accounted for the lion’s share of investment in infrastructure, with government pressure and asset-pooling initiatives playing a significant part in driving interest in infrastructure among these funds.

All 19 expressions of interest in infrastructure recorded by MandateWire last year stemmed from 18 local authority pension funds.

Additionally, 23 of the 35 infrastructure mandates awarded by UK asset owners over the past 12 months originated from 13 UK local authority pensions schemes, while 17 out of 22 recorded instances of assets reweighted to infrastructure were accounted for by 14 local authority schemes.

Investing in renewable energy

Among the local government pension scheme pools targeting infrastructure was Brunel Pension Partnership, composed of 10 local government pension schemes and with around £30bn in assets under management.

MandateWire reported in November last year that Brunel had launched two new infrastructure vehicles with manager Stepstone Infrastructure and Real Assets. The vehicles received £840m in new commitments from eight of the pool’s partner funds, of which £470m was directed to a fund focused on renewable energy opportunities and £370m went to a fund that will invest across transport, telecoms, heating and power, as well as other sustainable infrastructure.

The renewables vehicle has already made three primary fund commitments, to Capital Dynamics Clean Energy Infrastructure Fund X, Copenhagen Infrastructure Partners IV and the Brookfield Asset Management IV Renewable Sidecar.

“We believe it is crucial that investment is directed towards sustainable projects globally, to achieve the long-term objectives of our clients, support economic growth and work towards achieving the UN Sustainable Development Goals,” said Sofia Deambrosi, infrastructure investment principal at Brunel.

Another LGPS pool that has launched infrastructure funds is the Border to Coast Pensions Partnership, which handles the assets of 12 local government pension schemes worth a total of around £46bn.

MandateWire reported in July last year that the pool had secured £1.4bn worth of infrastructure commitments across two separate offerings: one (Series 1A) that has already been deployed, comprising eight investments totalling £675m; and one to be rolled out over the period to March 31 2021.

The eight investment commitments are in line with themes including energy transition, digital revolution, operational value-add, greenfield and emerging markets.

Border to Coast also secured a further £760m of commitments from its partner funds to its second infrastructure offering (Series 1B). These commitments are to be deployed in the period to March 31 2021 as part of a programme to build a diversified global infrastructure portfolio over the long term across core, core plus and value-add/opportunistic strategies.

“Infrastructure was identified as a key asset class for our partner funds as they seek new investment opportunities and better diversification of risk,” said Daniel Booth, chief investment officer.

Property stands firm

Property was the second most popular alternative among UK institutional investors, accounting for more than a quarter of all expressions of interest and executed investments in non-traditional asset classes last year.

Among the UK asset owners who invested in property was the £75bn Universities Superannuation Scheme, which recently agreed to acquire 199 freehold forecourts of oil and gas company BP, all in the UK.

Through an investment of £400m, USS will gain a 49 per cent stake in the property in a sale and leaseback transaction.

The scheme was looking to achieve a more stable cash flow, which it has secured under the annual rent reviews that are linked to inflation.

The pension fund noted in a statement that the “investment will join an existing property portfolio of nearly £4bn, which forms part of USS’s £18bn of investments in private markets assets. These are typically long-term investments made in the likes of property or companies and assets with inflation-linked cash flows”.

Other asset owners who made property investments were the circa £30bn Wellcome Trust, the £29.9bn Railways Pension Scheme and the Local Pensions Partnership, which oversees around £18.4bn on behalf of the London Pensions Fund Authority, the Lancashire County Council Pension Fund and the Royal County of Berkshire Pension Fund.

By contrast, demand for private equity has fallen, with MandateWire tracking a total of 48 planned and executed investments in the sub-asset class last year, a drop of 40 per cent compared with the previous 12-month period.

*Expressions of interest comprise manager searches, planned investments in a new asset class and planned investments in existing asset classes recorded by MandateWire.

**Investments comprise the number of awarded mandates and asset reweights tracked and reported on by MandateWire.

This article originally appeared on mandatewire.com