First glance at London Councils' CIV, designed to reduce £72.8m fee bill

This follows the creation of a limited-liability company, revealed in a press release on Monday, to house the vehicle. "We see no reason to divide the model by asset class," its chair and Mayor of Hackney Jules Pipe said on Monday: thus the single CIV.

The body hopes to award the mandate by the fourth quarter, and for it to be operational by the second quarter next year, with an initial market value of £5bn.

It expects these fund administration and depositary fees to be fractional, at between £50,000 to £500,000 over the course of the contract, set at five years, with the option to extend for a further five.

Drawing upon research from consultancy Hymans Robertson, the government announced in May that it was also exploring compelling schemes to use CIVs to reduce the costs of local authority pension fund investment.

Source: Department for Communities and Local Government

Though rightly reported asa major shake-up, and a potential blow for the fund management industry, the move picked up on the collaboration already implemented by many funds through the increased use of shared investment strategies.

London Councils, which is a representative body for the capital's 32 boroughs as well as the City of London, had been exploring over the past two years how to collaborate to reduce costs.

"With over £24bn of assets under management with 87 fund managers, across 253 mandates, and £72.8m¹ paid in fees in 2012/13, collaboration through the CIV is likely to deliver substantial savings," it explains on its website. So there is still a fair amount that hasn't yet been earmarked for collective investment. 

The boroughs also hope to take advantage of scale to invest in alternative asset classes, such as direct investment in infrastructure.

I've written before about the contrast in private equity performance between those such as the £39bn Universities Superannuation Scheme, with the scale to invest directly or to co-invest, and smaller funds such as the £4.9bn London Pensions Fund Authority, which suffered from higher fees in a fund-of-funds model. In the long-term illiquids world, schemes crave to cut out the middleman. 

In the press released statement on Monday, Mayor Pipe said: "There is sufficient flexibility to allow a variety of funds to be constructed that meet boroughs’ investment objectives."

The question of the variety of funds is key to how much it splits the pie, in terms of the savings that can be made.

Every slice cuts down that communal buying power, but pension fund investors will be acutely aware of the need to spread their risk.

Update: I have just got off the phone with Hugh Grover, project leader for the CIV at London Councils. 

Its current work is identifying those funds with potential overlap, or with the same manager, that can be brought into the CIV alongside each other. 

He said: “When you bring them together they will be treated by the manager as one client [for fee purposes].” Responsibility for investment strategy will remain with the individual schemes. 

Though Grover said it was possible that eventually all the boroughs’ assets could be brought under the CIV, he added “that is a very long way down the road”. That is, of course, unless the government intervenes. 

“If the boroughs are mandated to go down that route I think there are other aspects of that that the boroughs will want to discuss with the government.”

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¹An earlier version of this article mistakenly rendered this figure as £72.8bn. This was corrected immediately after publication.