LGPS Central goes big on private credit


4 Sep 2023

The pensions pool reveals why private credit is central to its investment approach. Andrew Holt reports.

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The pensions pool reveals why private credit is central to its investment approach. Andrew Holt reports.

Institutional investors should be looking at private credit for diversification and stable returns, according to one of the UK’s pension pools.

Mike Gillespie, investment director, private credit at LGPS Central, told portfolio institutional: “Private credit is a proper diversifier. The asset class is not generally correlated to public markets. There are good yield opportunities and good inflation protection through floating rate loans as well.”

The pool is putting its money where its conviction is, with LGPS Central confirming its LGPS Central Credit Partnership II has made its seventh commitment of €125m (£107m) to PCP Corporate Credit Fund V.

“PCP’s unique value proposition, bolstered by a successful track record, has captivated investors seeking diversification and stable returns. And this is a good opportunity for non-sponsored deal lending to add a layer of diversification,” Gillespie said.

Strong commitment

Gillespie revealed the pool has a large exposure to the asset class. “We have commitments with our partner funds of £2.5bn. We have four distinct strategies. “The first is the lower return sleeve, which invests in direct lending. Next is a real asset, which is a blend of infrastructure debt and real estate debt. Our third invests in index-linked investment grade infrastructure debt in the UK. Finally, we have a higher return sleeve, effectively a credit opportunities fund.”

LGPS Central normally goes for diversification by sector – healthcare, industrials, IT and the like. “What we don’t typically have is diversification by product type,” Gillespie said. “So when M&A are slow, we think it’s a good idea to invest in managers who specialize in ‘non-sponsored assets – where no private equity house is present in the capital structure – as these typically generate higher returns using lower leverage and better controls in our portfolio.”  

This investment represents the final commitment for the LGPS Central’s Credit Partnership II, with more than £1.1bn committed across seven managers. “PCP specialises in non-sponsored lending and targets mature businesses with stable cashflows in the middle market,” Gillespie said. Headquartered in Stockholm, the firm has a broad focus in Northern Europe, primarily in the difficult-to-access Nordics.

Actively managed

Gillespie said the firm has a good track record in European private credit having completed debt investments for more than two decades, representing €4.5bn (£3.86bn) of invested capital and generating an overall return of 10.8% during that period.

PCP actively manages its investments by undertaking detailed monitoring and, where appropriate, seeking board observer seats. By targeting the lower to core middle market and preferring to lead or co-lead investments, PCP maintains optimal control and influence over its portfolio.

The regional factor is a key attraction for LGPS Central, with a focus on non-sponsored deals in the Nordic and DACH (Germany, Austria and Switzerland) regions.

“They are hard to break into,” Gillespie said. “When we talk about European direct lending, we mainly mean UK and northern European countries. It is difficult to break into Scandinavia and the wider Nordic markets as they tend to do things in-house.”

There is no doubt that private credit has emerged as one of the most attractive asset classes, garnering attention from prominent institutional investors and amassing nearly $1.5trn (£1.19trn) in assets. This growth has been rapid in recent years. For example, six of the largest alternative managers have roughly doubled their assets under management devoted to private credit since 2019.

Major player

In this way, private credit has transitioned from being an investment niche to a central player in the financial sector. It is not difficult to see why. Private credit can offer investors higher yields, increased negotiating power, and favorable business cycle conditions, which are drawing in more and more investors, as the numbers suggest.

In this scenario, private credit has filled a void. “This year has seen continued high demand for private credit solutions as other sources of finance have become more scarce,” said Matt Douglass, senior managing director and head of PGIM Private Capital.

A point shared by Jo Waldron, head of client and solutions, private credit at M&G, who highlights the range of private credit on offer. “Private markets are made up of a series of different asset classes with different risk and return points. Assets range from investment-grade private placements to the more esoteric often sub-investment grade asset classes, such as direct lending. Every client’s risk-return profile is unique – private credit offers a credible option to achieving those goals via diversified stable cashflows,” she said.

But the rapid escalation of the asset class has resulted in questions being raised about the potential risks involved.

Gillespie accepts that risks do come with private credit. ““It is not risk free. We are currently experiencing double-digit yields in this interest rate environment. With that, comes higher risk and there will inevitably be bumps in the road. The biggest risk is that of default. The other risk liquidity is ever present. Private credit is a long-term investment through closed ended funds. There are no gated exits,” he said.


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