The UK’s largest workplace pension provider is to invest billions of pounds in infrastructure, which could be a game changer for the auto-enrolment pension scheme, finds Andrew Holt.
The UK’s largest workplace pension scheme is to invest almost £3bn in infrastructure globally by the end of the decade.
Nest has appointed GLIL Infrastructure and one of the world’s largest real estate investors to build an active equity portfolio of global core and core-plus infrastructure projects.
GLIL, which will invest alongside Nest, provides access to UK core infrastructure projects through its open-ended fund. This is the second move in this area by Nest in as many months, after it announced a £250m agreement with Octopus Renewables in March. The deal made Nest the UK’s first defined contribution scheme to commit to invest directly in infrastructure. This latest deal takes Nest’s allocation to the asset class to around 5%.
Digital networks, social housing, energy, waste treatment plants and seaports could be funded by Nest. Its initial commitment to this mandate will be £650m, with significant further funds scheduled to be released in later years.
Stephen O’Neill, Nest’s head of private markets, told portfolio institutional that the procurement process started back in January 2020. “As you’d expect, the pandemic put pressure on the process, but we were committed to running a thorough and detailed procurement.
“No decision was rushed and we reviewed carefully all the 34 applications we received,” he added. There were, however, several challenges along the way. “One of the biggest, naturally, was the pandemic and resulting lock-downs,” O’Neill said. “This put pressure on all parties involved in the process, particularly on my team to ensure the right level of due diligence was undertaken.”
Other challenges involved the unique nature of what Nest was undertaking. “Many providers in private markets have never really explored partnerships with DC schemes before – there is a process of education, alongside the search and selection pro- cess,” O’Neill said.
“The sharp end of this is in onboarding,” he added, “when Nest and our selected fund managers have to find mutually agreeable contractual terms, which are usually quite different from what other investors in private markets land on, because of the specific requirements of DC.”
But the testing environment did not compromise the robust nature of the process. “The major part of our due diligence pro- cess is getting under the skin of how managers think about and then invest in the asset class,” O’Neill said. “For infrastructure equity, we want managers that can demonstrate they understand the asset class in forensic detail, have a stable definition of the asset class, and understand how their assets and future investments need to evolve to suit a changing economy and regulatory environment, but without drifting into different types of risk taking for which they don’t have demonstrable pedigree in managing.”
The process was also underpinned by environmental, social and governance (ESG) considerations. “We prioritised ESG throughout our procurement process, clearly setting out the principles and policies we expect our fund managers to abide by and undertaking robust due diligence to test how they’d adhere to them in practice,” O’Neill said. “To illustrate the importance we placed on this, we screened out fund managers at every stage of the procurement process based on their performance on ESG.”
O’Neill also observed this was a more expensive asset class than other areas in Nest’s portfolio. “But we were clear fund managers needed to reconsider their fees before applying – we wanted to reduce any fee drag on our performance. “Fortunately, Nest is an attractive partner given our ability to invest our members money for decades and provide a reliable stream of money, taking around £400m in member contributions a month,” he added.
On the philosophy behind the infrastructure approach, O’Neill said: “We wanted to explore the role new asset classes could play in our portfolio, giving us options in the pursuit for the best risk-adjusted returns for our members. We believe direct infrastructure equity investments can o er diversification benefits and a return premium to public market equities, at lower levels of risk.”
The aim is for this to build strong partnerships. “We’re hoping to form long-term relationships with all three managers and therefore, are not intending to appoint anyone else, in the near to medium term, to help us invest in unlisted infrastructure equity.”
Ted Frith, chief operating officer at GLIL Infrastructure, noted that infrastructure investment is critical to supporting the UK’s recovery and building a sustainable economy. “Pension funds like Nest can play a fundamental role in helping to fund those projects. This initial capital commitment has expanded our fund to £2.5bn.”