Agenda item

The Committee considered a report which provided an update on the outcome of the Government’s ‘Fit for the Future’ consultation and pooling matters with LGPS Central (Central). A copy of the report marked ‘Agenda Item 10’ is filed with these minutes.

 

The Chairman welcomed Mr. Nadeem Husain, Ms. Gillian Day, Mr. Jas Sidhu and Ms. Jayne Atkinson from Central. They provided a presentation as part of this item. A copy of the presentation slides is filed with these minutes.

 

Arising from discussion, the following points were made:

 

1. A Member queried why the presentation was directed at ‘Professional Investors’ only. Central reported that FCA regulations stated that no advice should be given in a personal capacity as Central were not regulated to do so, and that it was a requirement that the statement be included.

 

2. Central had integrated Responsible Investment (RI) across all asset classes. Independent reviews of all investment funds were conducted to ensure they met the standards of RI expected, and reliance was placed on asset managers to act as responsible stewards, considering environmental, social and governance (ESG) factors. Central also aimed to ensure that governance practices were maintained over the long term, not just at the point of investment.

 

3. Central had adopted a deliberate overcommitment policy on capital committed to get to as close as 100% called as possible, as underlying capital from a number of managers did not always get called for in full and could be released.

 

4. Members were informed that the portfolio was not immune to what was happening globally, for example, one of Central’s businesses listed in India had been impacted by tariffs introduced by the United States. There was not a lot of exposure to the tariffs themselves, but market sentiment has investment returns to dip.

 

5. When seeking to clarify the term ‘co-investment’, Central explained, using an example, that when a manager sought to invest in a business requiring approximately £100 million, they might commit only £80 million to maintain portfolio balance. The remaining £20 million would be offered to limited partners. The program was designed to target investments in the £15–20 million range, appealing to managers who preferred not to involve numerous small investors or a single dominant one.

 

6. The team co-invested with high-performing managers in sectors where they had expertise, utilising their due diligence reports to evaluate risks and opportunities. While some co-investments occurred during the deal process, preference was given to investing after the manager had committed.

 

7. It was noted that co-investments involved direct stakes in companies, differing from fund investments. The approach offered two main advantages: avoidance of management fees (saving approximately 1.5% or more) and faster capital deployment due to clearer investment timelines.

 

8. In cases where a business was sold to another fund, the team assessed whether to remain invested based on the new manager’s quality and strategy. Generally, exits were aligned with the original manager’s decision.

 

9. In response to a question, it was noted that the typical private equity investment horizon of 7–10 years had extended due to reduced IPO activity. Managers opted to retain attractive assets longer until markets were right for an exit, creating continuation vehicles to maintain growth potential and offer transparency to new investors. While IPO markets remained active in regions such as India, which had led globally over the past two years, the US market had only recently begun to reopen. Medline, for example, postponed its IPO in the previous year due to market turbulence but had resumed plans as conditions improved.

 

10. Central reported that, following initial work on defining and developing local investment opportunities in response to government guidance, a clear definition of “local” was established, allowing for investments outside a region that still delivered local benefits. The team explored private market sectors, particularly housing and infrastructure, as viable routes. Engagements were held with regional managers, including smaller firms previously considered too limited in scale, while larger managers showed interest in adapting to the evolving market. The approach was designed to be sector-agnostic and regionally inclusive, with further development planned over the coming months.

 

11. Members discussed the evolving definition of “local” in relation to investment opportunities. It was noted that while Leicester, Leicestershireand Rutland were preferred, the broader pool area, potentially expanding across much of England, was also considered local. Concerns were raised about increased competition for attractive investments potentially inflating entry prices and reducing returns. It was clarified that local investments must meet standard return expectations and would not be accepted at lower returns solely due to location. Additionally, local investments would require reporting on social and economic impacts, such as job creation or environmental benefits.

 

12. Some Members expressed concern that such impact considerations may conflict with fiduciary duties focused on maximising returns for pension scheme members. Central agreed that maintaining an open-minded approach to investment types was essential, emphasising that expected returns must remain the priority over location. Also, that investments should not be limited to specific areas and highlighted the importance of diversification across asset classes such as property, private equity, private credit, and infrastructure, and stressed the need to balance return with risk and reputation, particularly in relation to partner funds.

 

13. It was explained that Central’s investment strategy had evolved, particularly in relation to regional funds and local growth plans. Previously, local venture funds were often too small, making institutional investors the largest contributors and exposing them to disproportionate risk. As allocations to local opportunities increased, fund sizes grew, reducing that risk. It was further reported there was ongoing collaboration with combined authorities, such as the West Midlands, to understand their investment models, which often involved grant-like capital.

 

14. Members queried whether the 2021 performance improvement offset underperformance in earlier vintages and questioned the realism of future return projections. Central clarified that the HSBC investment had not yet been deployed, and its returns were still projections, and explained that target returns varied by credit type, with direct lending targeting 6–8%, and more bespoke lending reaching up to 12–14%. It was emphasised that these were credit investments, not equity, and that the focus was on capital preservation and diversification. It was further noted that the higher interest rate environment since 2022 had improved returns and that in the event of defaults, the fund would be prioritised for repayment.

 

15. A Member queried whether property investment involved purchasing the building infrastructure only, or also leasing out individual units, which highlighted two opportunities: owning the fabric of the building and acting as landlord for the units. Central confirmed that both aspects were pursued, with buildings bought leased out, generating rental income.

 

16. A Member raised concerns about the challenges of investing in new infrastructure, noting that such projects rarely stayed on time or within budget due to early-stage pressures. Using the example of the Skye Bridge, he illustrated how initial tolls provided returns, but once removed, the yield disappeared, highlighting the difficulty of managing early financial shortfalls and long-term changes in revenue. In response, Central explained that investors typically mitigated early risks by contractually transferring cost overruns and delays to developers. The importance of selecting reliable partners and securing protective clauses was emphasised. Over time, infrastructure sectors, such as wind farms, had become more predictable in cost, helping to reduce early volatility. Addressing the issues of asset redundancy, Central noted that government-backed infrastructure often included conditions for asset return and maintenance at the end of its lifecycle, ensuring long-term usability and accountability.

 

RESOLVED:

 

That the LGPS Central report and presentation be noted.