NEST Seeks New Ways to Access Private Credit

UK public defined contribution workplace pension fund NEST is inviting managers of private credit funds to suggest “innovative” ideas to get its members invested in off-market debt.

“With volatility on the rise, we must find cost-effective ways to access alternative sources of return, and diversify risk for our members,” NEST CIO Mark Fawcett said in a release. “We see long-term potential in private markets and alternative asset classes. We’ve recently added commodities, and are now looking to add private credit to our toolbox.”

The fund said its research showed that although private credit has generally been considered too expensive and illiquid for defined contribution pensions, its members should, with some ingenuity, be able to benefit from the higher returns available.

“‘We’re looking to work with innovative fund managers who see the future potential in this market,” said Fawcett.

A private credit fund targets the ownership of higher-yielding corporate, financial, or physical, but non-real estate assets held within a private fund partnership structure. It can include so-called capital preservation strategies, such as mezzanine and senior debt funds in a bid for predictable returns while protecting against losses, as well as  “return-maximizing strategies,” such as distressed corporate credit funds and funds that focus on capital appreciation. According to investment firm Cambridge Associates, these type of funds offer the possibility of larger gains.  

NEST said the traditional model of small, closed-ended funds are unlikely to meet its needs, so it is seeking managers who can operate “evergreen,” scalable funds that focus on unlisted infrastructure debt, real estate debt, and corporate loans.

“NEST is welcoming innovative ideas about how to access these markets either independently or in a multi-asset solution,” said the fund in a release.

The fund also said it will have enough assets under management to look into direct and co-investment opportunities and wants to work with experienced managers to help develop NEST’s in-house expertise in the private credit area.

“We don’t buy the argument that private credit is out of reach for DC schemes,” said Fawcett. “Our members should have access to the same opportunities as pension savers in large, sophisticated DB schemes.”

NEST was established by UK legislation to run the NEST pension, and reports to Parliament through the secretary of state for the Department of Work and Pensions.