Seven years on – Private markets at Brunel
It is seven years to the month since I joined Brunel – an ideal moment to reflect on our pool’s extraordinary progress across private markets.
During this time, Brunel’s team has deployed £8 billion into new investments across five private markets asset classes and taken on management of £2bn in property investments. More than 33% of our partnership’s investments (including committed and non-pooled) now sit in private markets, compared to 15% before Brunel was formed. During this time, the total AUM has increased 70% and a quarter of all AUM is now managed by our 12-strong private markets team.
The government recently called for pension funds to invest more in private markets, so it is worth marking the exceptional progress made already.
Furthermore, the partnership as a whole has invested not only for members’ retirements, but for the world they will retire into – boosting growth and productivity (including harnessing AI with carbon-negative data centres); improving health outcomes; creating circular economies and recycling waste; protecting against cyber-crime; and mitigating and adapting to climate change, whilst investing for a just transition.
How did we get here? It all began with a decision by ten LGPS to work together.
Pooling 1.0
Between 2016 and 2018, the Brunel pool was formed. The steer from the government of the day was clear:
- Asset pool(s) that achieve the benefits of scale
- Strong governance and decision-making
- Reduced costs and excellent value for money
- An improved capacity and capability to invest in infrastructure
It was not anticipated that progress on the last of these aims would come quickly.
Brunel’s success
Brunel’s success has come from our clients’ willingness to work with us, and from us working with them constructively. We have focused on delivering on our clients’ ambitions and on our fiduciary duty of providing solid returns for members and pensioners by investing responsibly. In the case of private markets, this has worked best when we have done it collectively as a partnership, and collaboratively with our strategic partners, other pools and LGPS funds.
Attractive opportunities lead to £8bn of new PM investments
Where fiduciary duty has been satisfied, and the investment case has made sense, Brunel and its clients have met the challenge, investing at scale in private markets. £8bn of new capital has been committed into 162 investments in just 7 years – with fee savings. When Brunel was formed, our clients had just £1.3bn in private markets combined (ex-property), most of which they still hold outside the pool today (and is winding down). Brunel also took under management £2bn of property investments, £1.6bn of which is now being entirely UK-focussed and has been fundamentally reshaped.
This has all been made possible via Brunel’s innovative private market model, selecting fund investments internally and also working with strategic partners who are global leaders in their asset classes to select co-investments and funds where applicable.
These experts complement Brunel’s internal team of 12 private markets investment professionals (vs. just five at the start), acting as extensions of Brunel’s internal team – meaning we are already able to achieve what the ‘Canadian model’ aspires to. This is exemplified by the 32 coinvests – in global infrastructure projects and platforms (9 in UK) – Brunel has made, working with StepStone since 2020, alongside 24 distinct leading infrastructure sponsors. Likewise, Brunel cornerstoned Neuberger Berman Impact Private Equity (PE) Funds 1 and 2, which are 60-70% co-investments, alongside 20+ different third-party PE sponsors each. (‘Cornerstoning’ here refers to being one of the first investors in a new fund, often at size.)
Our private markets model
Brunel’s model brings the best of all worlds. Brunel’s R.I. leadership and dual investment committee process, combined with our strategic partners’ scale, proven track records and global team resources provides a flexible, scalable, resilient and cost-effective solution. Net returns of early realisations from our more mature vintages already offer an early indication of success.
We not only benefit from pool and LGPS aggregation, but also aggregation with our non-LGPS partners. We have applied all our knowledge and experience of how to avoid the pitfalls of investing in private markets, gained over 15+ years. Recent news stories have demonstrated that these pitfalls are continuing to cause plenty of problems.
Co-investing with a wider number of sponsors adds a critical layer of diversification that single-sponsor platforms can’t replicate. Similarly, access to top-class, voluminous deal flow is fundamental to the ability to be highly selective when choosing investments. Co-investing is most certainly not just an extension of fund selection, but a spectrum from basic post-deal syndication to co-underwrite and mid-lives at the upper end of complexity – it is an entirely new ball game requiring distinct expertise, continuous primary allocations to funds in their investment periods and compensation structures that are beyond pension funds in order to make them sustainable.
Scale, RI and UK opportunities
Where the risk, reward and diversification characteristics of an investment has made it eligible, we have invested in UK infrastructure and affordable housing assets, often as the founding investors in small funds targeting mid- and lower-mid-market opportunities. The scale that pooling has created has unlocked certain investments.
For example, Brunel was the founding investor in the Greencoat Renewable Income fund from its Secured Income portfolio, which has invested £1.1bn in >140 UK Solar farms, 3 UK offshore wind farms, 4 UK energy from waste wood assets, pathfinder UK green hydrogen projects and the largest UK heat network platform. This one fund is an example of the 162 investments that Brunel has selected in private markets over the last 7 years (see more examples in the Appendix below).
More UK required?
There have been few exciting UK investment opportunities during the last 7 years, and certainly not as many as there could have been. In infrastructure, over the past decade, the UK opportunity set shifted markedly away from PFI/PPP social infrastructure projects with highly attractive ‘availability payments’, towards energy, economic and utility-related assets with fundamentally different return profiles and drivers.
According to Equitix, the UK now has a backlog of between £50bn and £300bn of capital maintenance in the public sector and social infrastructure facilities. Public sector bodies must balance their operational cash requirements with what they can afford to retain for capital maintenance in the future. Resolving this might explain why there has been a relative drought in new UK project supply, whilst more attractive opportunities have been forthcoming in Europe and the US from private sources with fundamentally different business models to those in the UK.
The one global bright spot to date, thanks to the growth of the private power purchase contract market, has been mature renewable energy sectors. Enabled by our clients’ climate mitigation ambitions, we have invested ~50% of all infrastructure capital in the broad energy transition, diversifying across geographies, regulatory regimes, technologies, stages, vintages and GPs.
However, this too is now at risk, with the review of electricity market arrangements looming in the UK; the urgent need to focus on energy efficiency measure; the lack of proven long-duration energy storage technologies with subsidy arrangements to support even higher renewable penetration; and few new low-carbon baseload opportunities. Lack of certainty will discourage further investment.
In affordable housing (which is not classed as infrastructure due to the lack of long-term contracts), the investor demand has been there, but the availability of investible projects has been lacking, and to a certain extent pricing has led to stock no longer being ‘affordable’.
What can the government do – and what is next?
In Brunel’s case, the pool has made a giant leap during the last seven years in terms of the build-out of our private markets investment capabilities and deployment on behalf of clients. Including commitments, c. 33% of the partnership’s entire assets are currently invested into private market opportunities. There is therefore little more capital available to deploy until capital is recycled or strategic asset allocation weights change. (Let’s not forget the great denominator effect and liquidity crunch of 2022).
If we can work with the Mayoral Combined Authorities to bring forward new projects which make sense from an investment perspective and allow pension pools to meet their fiduciary duties to stakeholders, other investors would come to the table. The ball is currently in the UK government’s court to put forward proposals for its preferred infrastructure procurement and financing models, in advance of giving Administering Authorities the funding and advice to convert ideas into market facing opportunities.
For more detail on our Private Markets investments and specific projects we are invested in, see: