Place-based impact investments gain traction among LGPS

As in the second quarter of 2024, in Q3 the 32 individual local government pension schemes and seven LGPS pools surveyed by MandateWire focused on alternative portfolios, in part due to the UK government’s push to encourage the LGPS to provide UK private market funding.

With that, the number of alternative mandates awarded in the quarter was double the number of all other mandates awarded.

After taking power at the start of the quarter, the new Labour government quickly confirmed that it would build on the steps taken by the Conservatives to encourage pension funds to invest in the UK. In mid-July, chancellor Rachel Reeves announced a pensions review “to boost growth and make every part of Britain better off”.

Among the pension schemes looking to invest in the country was the £11bn ($14.7bn) South Yorkshire Pensions Authority. It has established a place-based impact investment plan in line with the previous Conservative government’s levelling-up agenda.

Local opportunities

The plan will see the pension fund invest up to 5 per cent of its assets into direct and indirect social impact investments, with around half focused on the South Yorkshire area. Specifically, 1 per cent of scheme assets will be directed towards local general housing needs, 1.3 per cent will be allocated to local development lending and 0.2 per cent will be invested in local venture capital.

Meanwhile, 1 per cent will be directed to specialist housing needs and 1.5 per cent to private equity and private debt at a UK-wide level.

The pension fund aims to find opportunities in the sweet spot between stable returns for pension members and the creation of social impact, according to George Graham, head of paid service at the SYPA.

A popular route to UK investment was via social housing investment. Of the 14 alternative mandates awarded in the quarter, nine were property contracts and seven were domestic property.

The appointments came from three individual local authority pension funds and two LGPS pools. All three of the individual funds – the £31.3bn ($41.9bn) Greater Manchester Pension Fund, the £2.2bn ($2.9bn) Clwyd Pension Fund and the £5.9bn ($7.9bn) Devon County Council Pension Fund – made social and affordable housing investments.

GMPF specifically made two separate investments, allocating £120mn ($160.5mn) to the Legal & General Affordable Housing Fund, which was launched in July, and placing an undisclosed sum into Henley Investment Management’s Secure Income Property Unit Trust II.

Commenting on the latter deal, which sits within GMPF’s impact portfolio, chair at the pension fund Gerald Cooney said: “The provision of specialised social housing is particularly acute in the North West and Henley will be investing in high quality accommodation for vulnerable individuals, as well as providing a secure income stream for our pension fund.”

When it came to future investment plans, domestic property was the focus of two searches logged in Q3, including from the ACCESS pool, which handles £45.9bn ($61.5bn) in pension assets for 11 local government pension schemes worth a collective £59bn ($78.9bn). In July, it launched a search for a UK impact real estate investment manager for a decarbonisation-focused impact mandate.

Private plans

Other private market opportunities were more sought after, however. MandateWire learned of six instances of LGPS funds either actively seeking private market managers or planning to allocate further to the asset class, with an equal split recorded between private equity and private debt.

Again, the ACCESS pool featured among the asset owners looking to allocate. In August, it began seeking managers to run senior secured direct lending strategies across two distinct mandates: a £200mn mandate focusing on Europe and a £150mn mandate targeting US markets.

Meanwhile, the £1.1bn Waltham Forest Pension Fund was urged by its investment consultant Mercer to consider making a foray into private equity.

“Private equity, depending on the appetite within the committee, could form part of the commitments to alternatives. This could be combined with training on natural capital/biodiversity investments, given that this falls under private markets, and given the continued process by [the London CIV] in preparing to launch a nature-based solutions fund,” documents presented at a Pension Committee meeting read.

In a move that is out of step with the focus of most other LGPS surveyed in the quarter, the Waltham Forest Fund intends to rely more heavily on infrastructure and private equity for future diversification purposes, than on property.

“Reducing the property allocation would be consistent with the direction of travel in terms of building up infrastructure and private equity allocations, where returns look more attractive,” the fund stated in the meeting documents.