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The £40bn BT Pension Scheme is aiming to invest in private credit as the UK’s largest corporate retirement plan joins the trend in the sector of funds seeking to take advantage of banks’ growing reluctance to lend.
Rising interest rates over the past 15 months have led to banks reining in their lending, opening up opportunities for institutional investors such as pension schemes to step into the funding gap.
Wyn Francis, chief investment officer at Brightwell, the investment manager for the BT Pension Scheme, told the Financial Times that the fund was looking to take advantage of the changing lending climate as it continued its move away from equities.
“I see an opportunity in the next 18 months to deploy [capital into private credit] if the anticipated tightening through central bank policy transmits into the market,” he added.
“Private credit has stepped in and I’m expecting this to accelerate,” Francis said on the sidelines of the Pensions and Lifetime Savings Association conference in Edinburgh. “So, in other words, as it becomes more difficult in the traditional lending market, this then plays into some of the private credit managers.”
Since the 2008 financial crisis, private credit has become an increasingly important source of finance for small businesses across the globe. Private credit managers provided an estimated $127bn worth of loans in 2021, up 20 per cent on the year before, according to the Alternative Credit Council, which represents businesses in the private credit and direct lending sectors.
A move into private credit would be part of the BT scheme’s plan to secure retirement payments through so-called cash-flow matching, an approach that seeks to match expected returns from investments with expected payouts to pensioners in a defined benefit scheme.
The BT pension plan, which closed to new entrants in 2001 and has 275,000 members, is at present paying out about £2.5bn a year to current pensioners.
“Our ambition is to build our cash-flow matching portfolio by 2034, which is when all of our members will move from savers to pensioners and be drawing income,” Francis said. “We find that private credit gives us not just the cash flow generation, but there’s also a risk premium in there. That works for us.”
To meet its objective, he said the plan would consider investing in “anything with a contractual income”, such as real estate or bonds, in addition to private credit.
He declined to put a figure on the potential scale of investment in private credit but said it could become “significant” as the fund sold off assets that were not cash-flow matching.
“If you assume that we need to be cash-flow matched by 2034 . . . we are around a little bit over 50 per cent of that at the moment,” he said. “But the buildout needs to come over a number of years.”
Francis said the scheme did not intend to become a direct lender, but would invest in private credit funds.
The BT fund’s strategy comes as other global investors seek to increase their exposure to private debt following the recent upheavals in the banking sector, including the collapse of Signature Bank and First Republic in the US and the sale of Credit Suisse to its Swiss rival UBS this year.
Calpers, the biggest public pension plan in the US, said last month that “there are opportunities it could pursue” based on current tightening in the banking industry.
The US Federal Reserve last month warned of a “sharp contraction” in credit. Big private capital companies such as Blackstone, Apollo Global Management and KKR have been exploring ways to increase their exposure to private credit.
Francis stressed, however, that there were “liquidity risks in private credit” for investors.
“I think it’s really important for anyone who wants to invest to build a diversified portfolio,” he said. “Diversification is your friend.”
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