UK to Issue More Inflation-Linked Bonds as Demand Soars

The UK is to issue £500 million more in index-linked gilts this year, following a record level of demand for its latest issuance.

The UK’s Debt Management Office (DMO) attracted £14.5 billion of demand for a long-dated index-linked gilt at an auction this week, almost three times as much as it was seeking to raise. This was despite the bond having the lowest recorded real yield for a “linker”, at -0.053%.

Linkers are a key tool within liability-driven investing strategies as they can help match liabilities while keeping pace with inflation.

Ritesh Bamania, senior consultant in Mercer’s financial strategy group, said there was no indication that the assets would get significantly cheaper in the future.

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In a statement accompanying the issuance, the DMO said it would increase its planned index-linked issuance for the 2014-15 financial year by £500 million to £9 billion. It also plans to issue £9 billion in conventional government bonds.

Bamania said: “There is always a case for lobbying for more long-dated index-linked gilts, but a few months ago the government said it would be cutting back on issuance. That may be one of the things keeping yields so low.”

Lucy Barron, senior solutions manager in AXA Investment Management’s UK liability-driven investing team, said the imbalance between supply and demand was “unlikely to be eased any time soon”, as there are roughly £400 billion of linkers in issue versus demand in excess of £1 trillion.

Bamania said institutional investors were weighing up other asset classes with inflation protection characteristics to fill the gap, including property and infrastructure.

“There are new quasi-property funds with RPI-linked rental increases, but these bring illiquidity with them,” he said.

But he added that index-linked gilts would still have a key role to play regardless of high prices. “Our clients are not just looking at price. It’s all about controlling risk, and the timeframe of the investment,” he said.

Asset owners hunting for the holy grail from alternatives managers—consistent alpha—would have done well to expand searches beyond the big names, according Preqin research.

Four buyout firms out of 196 earned perfect scores in the data provider’s league table: Sweden-based Altor, Wynnchurch Capital of Chicago, and, from New York, Rhône Capital and Trilantic Capital Partners.

Every fund raised by these four managers in the qualifying timeframe posted top-quartile performance based on both investment multiple and internal rate of return. Preqin took into account fund vintage, strategy, and geographic focus, restricting the list to active buyout managers that had raised at least three funds of similar strategy. Furthermore, qualifying firms must have either raised a new vehicle within the last six years or be in the process of doing so.

Nearly one-third (11) of the 35 managers on this year’s list of consistent outperformers were new additions since 2013. These up-and-comers include top-ranked Rhône and Trilantic, as well as Waterland (based in the Netherlands), Pechel Industries (France), Odyssey Investment Partners (US), ONCAP (Canada), and DRC Capital (Japan).

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Only a few of private equity’s established giants appeared on the list. Morgan Stanley’s private equity division ranked fifth, ahead of fellow veterans TA Associates, Apollo Global Management, and Berkshire Partners.

Blackstone, Carlyle Group, TPG, KKR, and Goldman Sachs Capital Partners were notably absent, either because they fell outside qualification parameters or failed to deliver sufficiently consistent alpha.

For example, Bain Capital—one of the largest private equity firms by assets under management—cracked the top 15 in Preqin’s 2009 list, but failed to earn a spot this year. Bain closed its most recent flagship buyout vehicles in 2008 (Fund X) and last April (Fund XI). The Boston-based alternatives shop did, however, come sixth among consistent performers in venture capital, which Preqin also ranked.

Five venture firms, all US based, earned perfect scores for top-quartile performance: Pittsford Ventures Management, Sequoia Capital, Benchmark Capital, OrbiMed Advisors, and Union Square Ventures.

Fund-of-funds managers—the third and final group assessed in the report—had the spottiest track records overall. Out of 92 qualifying firms, only Denmark-based Nordea Private Equity earned full marks.

Preqin PE

Source: 2014 Preqin Private Equity Performance Monitor (forthcoming)

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