News & analysis LGPS CENTRAL GOES BIG ON PRIVATE CREDIT


The pensions pool reveals why private credit is central to its investment approach. Andrew Holt reports.


Institutional investors should be looking at private credit for diversification and stable returns, according to one of the UK’s pension pools. Mike Gillespie, investment director, private credit at LGPS Cen- tral, told portfolio institutional: “Private credit is a proper diversi- fier. If you look at the asset class it is not correlated to public markets. There are good yields, opportunities and inflation pro- tection through floating rate loans as well.”


The pool is putting its money where its conviction is, with LGPS Central confirming its LGPS Central Credit Partnership has made its seventh commitment of €125m (£107m) to PCP Corporate Credit Fund V. “PCP’s unique value proposition, bolstered by a successful track record, has captivated investors seeking diversification and stable returns. And this is a good opportunity for non- sponsored deal lending to diversify,” Gillespie said.


Strong commitment Gillespie revealed the pool has a large exposure to the asset class. “We have commitments with our partner funds of £2.5bn. We have all strategies.


“The first is the lower return sleeve, which is direct lending. Next is real asset, which is a blend of infrastructure debt and real estate. Third, we have index-linked investment grade infra- structure debt in the UK. And finally we have a higher return sleeve, effectively a credit opportunities fund.” LGPS Central normally goes for diversification by sector – healthcare, industrials, IT and the like. “What we don’t typically have is diversification by product type,” Gillespie said. “So when you see markets that are slow, we think it’s a good idea to invest in managers who specialise in ‘non-sponsored assets as these typically generate higher returns using lower leverage and better controls in our portfolio.” This investment represents the final commitment for the LGPS Central’s Credit Partnership II, with more than £1.1bn committed across seven managers. “PCP specialises in non- sponsored lending and targets mature businesses with stable cashflows in the middle market,” Gillespie said. Headquartered in Stockholm, the firm has a broad focus in Northern Europe, primarily in the difficult-to-access Nordics.


Actively managed Gillespie said the firm has a good track record in European pri- vate credit having completed debt investments for more than two decades, representing €4.5bn (£3.86bn) of invested capital


6 | portfolio institutional | September 2023 | Issue 126


and generating an overall return of 10.8% during that period. PCP actively manages its investments by undertaking detailed monitoring and, where appropriate, seeking board observer seats. By targeting the lower to core middle market and prefer- ring to lead or co-lead investments, PCP maintains optimal control and influence over its portfolio. The regional factor is a key attraction for LGPS Central, with a focus on non-sponsored deals in the Nordic and DACH (Ger- many, Austria and Switzerland) regions. “They are hard to break into,” Gillespie said. “When we talk about direct lending, we mainly mean UK and northern Euro- pean countries. It is difficult to break into Scandinavia and the wider Nordic markets as they tend to do things in-house.” There is no doubt that private credit has emerged as one of the most attractive asset classes, garnering attention from prominent institutional investors and amassing nearly $1.5trn (£1.19trn) in assets. This growth has been rapid in recent years. For exam- ple, six of the largest alternative managers have roughly dou- bled their assets under management devoted to private credit since 2019.


Major player In this way, private credit has transitioned from being an investment niche to a central player in the financial sector. It is not difficult to see why.


Private credit can offer investors higher yields, increased negoti- ating power, and favorable business cycle conditions, which are drawing in more and more investors, as the numbers suggest. In this scenario, private credit has filled a void. “This year has seen continued high demand for private credit solutions as other sources of finance have become more scarce,” said Matt Douglass, senior managing director and head of PGIM Private Capital.


A point shared by Jo Waldron, head of client and solutions, pri- vate credit at M&G, who highlights the range of private credit on offer. “Private markets are made up of a series of different asset classes with different risk and return points. Assets range from investment-grade private placements to the more esoteric often sub-investment grade asset classes, such as direct lend- ing. Every client’s risk-return profile is unique – private credit offers a credible option to achieving those goals via diversified stable cashflows,” she said. But the rapid escalation of the asset class has resulted in ques- tions being raised about the potential risks involved. Gillespie accepts that risks do come with private credit. “It is not risk free. We are currently experiencing double-digit yields in this interest rate environment. With that, comes high risk. The biggest risk is that of default. The other is risk liquidity. Private credit is long-term. There are no gated exits,” he said. Read more on private credit from page 20.


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