Agenda item

8.1       Following the Fund’s strategic investment review, the committee considered integrating ESG Private Equity into the Fund's strategic asset allocation. This included an overview of ESG Private Equity, its characteristics, risks, market conditions, and Isio’s perspective on its attractiveness.

8.2      Private Equity involves ownership of non-publicly listed companies. Its returns are variable, requiring specialized expertise for access. Investments can be direct or through pooled funds, including open-ended, closed-ended, listed funds, and funds of funds.

8.3       Private Equity presents higher risks but is expected to offer compensatory returns. Risks include illiquidity, small company volatility, equity exposure, and manager selection challenges. Isio emphasised the potential volatility in pricing due to the absence of a listed market.

8.4       Isio outlined integrating ESG into Private Equity with a focus on impact investment aligned with UN Sustainable Development Goals. However, Isio advised there were limited ESG market opportunities within the current market.

8.5       The Department for Levelling Up, Housing, and Communities released an LGPS Consultation proposing a 10% allocation to high-growth private equity schemes. The consultation outcome is pending, and proposals, including the 10% allocation, are expected to face significant opposition, especially in the face of many LGPS funds having achieved comfortable full funding status.

8.6       The Fund's actuarial valuation in March 2022 showed a funding level of 128%, rising to 160% by September 2023. Considering this strong funding position, the Fund has reduced overall risk, adjusted allocations, and refrained from including Private Equity in the strategic asset allocation due to its failure to meet risk reduction objectives.

8.7       Isio advised that market conditions reveal a softening of capital raised in private equity, cooling investor interest, elevated buy-out pricing, and increasing market share of smaller deals. The sector faces uncertainty with interest rate changes impacting debt financing costs, posing challenges for future returns.

8.8       The Tri-Borough Director of Treasury and Pensions emphasised to the Committee the long-term, hard work that had been undertaken by the Council to ensure the Pension Fund was fully funded. Moreover, the Council had deployed nearly £200m in deficit payments in the last six years, some of it from the council’s own cash reserves to pay off in full its own employer deficit at 31 March 2022. A Committee Member challenged whether the Fund should be targeting higher returns in order to reduce employer contributions in future. Officers refuted this concept, stating that there had been an opportunity to cost the use of those internal funds, and advised against this in the quest for returns from higher risks assets, especially when the current 160% funding level was the second highest within the LGPS scheme. It was officers’ and Isio’s intention to provide advice on how to preserve the current, comfortable funding position.

8.9       Isio advised the Committee that it was not necessary to chase additional returns beyond those agreed during investment strategy and to protect the current funding level. Given market conditions and the limited ESG opportunities in private equity, Isio recommended against an allocation to this asset class until there is greater clarity from the LGPS consultation.

8.10     The Committee agreed to reconsider ESG Private Equity further into the future, once formal communication from the DLUHC on the LGPS consultation is received, and ESG integration within the market is more developed. Agreeing that allocating to private equity before this could result in costly restructuring later and the lack of need to take additional risks given the excellent funding level.

8.11     The Chair of the Pension Board was present at Committee, and asked if there was consideration to private equity opportunities in developing countries such as Malaysia. Andrew Singh, Investment Advisor - Isio, replied to the Chair of the Pension Board and said that the consensus is that emerging markets are set to grow strongly in the coming years but currently the bulk of the private equity market is in the developed world.