LGPS funds set to increase private market allocations

Local Government Pension Scheme (LGPS) funds in England and Wales are set to increase their allocation to private markets as they search for secure, inflation-linked cashflows to help meet their liabilities.

Following a recent survey, Alpha Real Capital has found that 91 percent of LGPS professionals believe the funds they work for will increase their allocation to private markets over the next five years.

Nearly two-thirds (60 per cent) of the 100 LGPS fund professionals questioned for the survey estimated that their allocation will rise by between 5 per cent and 10 per cent.

Alpha Real Capital, which specialises in real assets, said that the trend towards private markets — and real assets in particular — is being driven by the current inflationary environment and the need for LGPS funds to maintain attractive returns and diversified portfolios.

Alpha Real Capital's head of client solutions, Boris Mikhailov, said that LGPS funds are also increasingly prepared to allocate more capital to illiquid investments such as real assets as they can have quantifiable and measurable ESG benefits. Investing in social or renewable infrastructure, for example, allows funds to pursue their ESG agendas "without sacrificing much needed investment performance”.

Another study carried out last year by the manager with general UK professional pension fund investors, discovered that schemes already have substantial allocations to illiquid assets.

More than half (58 per cent) of those surveyed said their scheme allocated up to 25 per cent to illiquid assets as part of their investment strategy, and 37 per cent said they allocated up to 10 per cent.

The study found that the main reason for increasing interest in illiquid assets is greater transparency around the asset class, with 79 per cent of those pension professionals surveyed last year saying that they planned to increase allocations for this reason.

Alpha Real Capital CEO, Phillip Rose, added: “Globally, private markets rallied to new heights in 2021 with a significant rise in fundraising, and assets under management (AUM) grew to an all-time high of nearly $10trn.

“Given the many attractions of private markets such as long-income real estate, social infrastructure and renewables infrastructure, including predictable income, inflation linkage and low volatility, we expect LGPS to significantly increase their allocation to these asset classes over 2022 and beyond.”

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