The Church of England Pensions Board is “on the cusp” of making an allocation to private credit in the US, as it seeks returns uncorrelated to equities.
Private lending has gained traction among many pension schemes since the financial crisis, as restrictions on banks' ability to lend has enabled schemes to move in to fill the void as they search for higher yields.
The downside is the illiquidity of these things… you can’t get out easily
Jon Exley, KPMG
The board, which is responsible for the Church’s three schemes, manages assets worth more than £1.8bn.
“We’re on the cusp of making an allocation to private loans in the US,” said Pierre Jameson, chief investment officer for the fund. “[It is] something we’ve been working on for maybe 18 months.”
He added: “The attraction is about stable, long-term returns that are quite uncorrelated to equity returns.”
Jameson said there were “strong inefficiencies” in the US market for loans, with spreads offering 6-7 per cent above Libor.
Private loan investment
Sanjay Mistry, director of private debt at consultancy Mercer, said: “We see [private loans] as a diversifier. They tend to be non mark-to-market, interest rate protected, floating rate instruments.
“[They] give you access to the alternative credit space that’s been flourishing post-financial crisis.”
Mistry said the opportunity for private loans was bigger in the US as non-bank lenders became established earlier than their European counterparts, but he added: “We see strong opportunities here too. It’s been a high-demand asset class, lots of interest across portfolios.
“Where the capital is going tends to be corporate, real estate and infrastructure lending with stable flows and reasonably strong creditors attached.”
Jon Exley, partner at KPMG, said interest in the asset class had been growing since banks withdrew from the market in the wake of the financial crisis.
He added the best opportunities are to be found in the US, northern Europe and the UK, but investors should make sure they have the right legal protections when entering into a deal to ensure they are protected in the event of a default.
Exley explained: “You’re essentially acting like a bank, so just making sure you have first charge over assets and that kind of thing. [Checking] how robust that charge is. What are the bankruptcy administration laws?”
However, he added: “The downside is the illiquidity of these things… you can’t get out easily, it’s a five to seven-year contract.”
Despite this, Exley said borrowers have early repayment options that can cut the investment short.
Risk management strategy
Jameson said the scheme was also preparing to name a liability-driven investment manager as part of its larger focus on developing a risk management strategy, which will be appointed this quarter.
“It will involve LDI and probably some rerisking as well," he said. "We have to be conscious of not limiting the return-seeking assets.”
