Nest puts private markets in the hands of its savers

• Stephen O’Neill, Nest’s Head of Private Markets: “We’re taking a significant step in increasing the investment opportunities for our members”
• Nest announces initial 12-month commitment of around £400-500 million
• Nest’s new investment subsidiary submits FCA application, supporting private market investing

Nest has today announced two fund managers it will use to invest in private credit, enabling its eight million members to benefit from the sophisticated investments found in private markets. 

Private credit investments are not traded on a public exchange or market but are usually directly negotiated loans between an investor (or small group of investors) and the loan’s recipient. Investors negotiate bespoke rates but are expected to tie up their money until the loan matures, for which they are normally rewarded with better returns – known as an ‘illiquidity premium’.  

Amundi and BlackRock are the first successful fund managers confirmed by Nest at a launch event held in Bank. Both fund managers were selected for their innovation and cost-efficiency following a highly competitive open tender, in which nearly 40 organisations applied. 

Nest will initially be targeting about 5 per cent in private credit but it will take some time to reach that target – the pension scheme doesn’t want to force money into the markets. The initial 12-month commitment will be around £400-500 million.

Stephen O’Neill, Nest’s Head of Private Markets, said:

“Today Nest is taking a significant step in increasing the investment opportunities for our members and following the example of leading DC schemes overseas by moving into private markets.

“Nest’s size and future growth helps negotiate great deals with fund managers, meaning our members can grasp with both hands the opportunities presented by private credit.

“We’re long-term investors - our youngest member is just 16 and she could be investing with us for more than 50 years. She’s the perfect person to be entering into private markets. We can be patient with her investments so she’ll benefit from the illiquidity premium you get with these types of loans.

“Our new fund managers are already sourcing loans in their respective markets and we expect to begin deploying capital as soon as October. 

“We’ll be careful to manage our exposure to illiquids so that while they’ll play an important role in our portfolio, it won’t be a dominant one. Our positive cash-flows will ensure members retain the ability to move their savings around.”

There are many examples internationally of where schemes have already moved into private markets. Australian super funds and workplace schemes in North America have been accessing private credit for years and is a mainstay of their funds’ building blocks.

Benefits to investing in private markets include:

• They’re a reliable source of income at often a lower level of risk than is found in equivalent public markets.  
• Nest will have a more direct link to the companies it invests in, making it easier to implement our environmental, social and good governance (ESG) criteria when working with fund managers in the selection of the right loans.
• Private markets may not be influenced by the same growth drivers as public markets, meaning they can offer additional diversification benefits.

Nest’s announcement is accompanied by the news it has created a subsidiary company which has applied to the FCA for authorisation as a regulated investment firm, something which, if granted, will make it easier for Nest to secure co-investments in private markets.

The subsidiary, called Nest Invest, is seeking authorisation to become an FCA regulated Occupational Pension Scheme (OPS) firm. OPS firms undertake investment management on behalf of a trustee or pension scheme and have the ability to manage more complex investment decisions and tasks in-house.

This move follows in the footsteps of a number of other large UK pension schemes, including RBS and BT, which have also created OPS firms.  

Nest Invest will allow Nest to implement more sophisticated ways of investing on behalf of its members, some of which require specific FCA regulation. These additional investment activities include: 

• Providing regulated advice to Nest’s Board on new investment opportunities
• Enabling Nest to co-invest in private markets 
• Directing our fund managers to use derivatives in order to help invest our cashflows and manager risk efficiently 

Mark Fawcett, Nest’s Chief Investment Officer, speaking on the investment subsidiary highlighted how this was an important step in the pension scheme’s evolution.

“Nest is going to be responsible for £450 million new contributions every month. We’re becoming one of the largest players in the UK pension’s market and our investment strategy is evolving to reflect that.

“While setting up Nest Invest is an exciting development, it’s the natural next step for a scheme of our size. We already have the internal expertise in Nest’s investment team to manage the additional responsibilities.”

The FCA is expected to respond to Nest Invest’s submission later this year.

Notes to editors

The new fund managers announced by Nest will be responsible for specific areas of private credit:

• Amundi - global real estate debt
• BlackRock - global infrastructure debt

A consultation by DWP in February this year - Investment Innovation and Future Consolidation – detailed how government is encouraging defined contribution (DC) pension schemes to consider investing in illiquid assets. DWP want to encourage schemes to consider investments outside of the public sectors: “by investing almost wholly in highly liquid investments such as publicly-listed equity and debt, beneficiaries can miss out on the illiquidity premium which results from being invested for the long term”.