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:

1. Asset pool(s) that achieve the benefits of scale
2. Strong governance and decision-making
3. Reduced costs and excellent value for money
4. 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 RI 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.

Our private markets investments and projects:

High level overview of deployment since launch:

From £0 – c.£10 billion in private market AUM in just 7 years, ~25% of total Brunel pool client assets
£8.0 billion of new capital invested and allocated since Brunel’s formation by our underlying clients to Brunel’s portfolios
£860 million invested in UK renewable energy & transition by the Brunel Portfolios on behalf of our clients, plus £330m by our clients directly via Wessex Gardens
£150 million into Affordable Housing since 2021 by Brunel Portfolios (UK Property & Cornwall Local Impact)
£1.6 billion of UK Property transferred to Brunel management

Number of portfolios and investments made:

24 distinct private market portfolios, across 6 assets classes, 4 vintages and 2 elective services including Cornwall Local Impact Portfolio
Selected 162 investments so far, across fund types (primaries, secondaries, coinvest) as well as direct coinvests and fund secondaries

Infrastructure investments made with a focus on UK renewables:

32 coinvests in Infrastructure projects and platforms, across all sectors – living up to the aims of Pooling set out in 2016 to improve returns, reduce fees and costs and gain more direct access for our clients by investing on behalf of 10 clients instead of one
9 UK coinvests
Coinvesting is saving our Infrastructure clients alone >£5m p.a.
£2.9bn invested & committed in Infrastructure, >80% of which is defined as ‘sustainable’; 54% (£1.55bn) of which in Renewables & Energy Transition assets globally (climate change is a global issue)
Our clients formed their own fund, Wessex Gardens: a further £0.3 billion into South-West located renewables
55% of all Renewables asset £ invested (£860m) in the UK, across onshore wind, offshore wind, solar PV, battery storage, interconnectors, green hydrogen, bioenergy from waste, heat networks

Scale allows large and innovative investments to be made:

Brunel cornerstoned a majority UK onshore wind fund in 2019 with £83m of £300m fund raise (Capital Dynamics Clean Energy 8)
Brunel cornerstoned the NextPower UK ESG fund with fellow LGPS
Brunel cornerstoned the Greencoat Renewable Income fund from its Secured Income portfolio, which has invested £1.1bn in >140 UK Solar farms, 3 offshore wind farms, 4 bioenergy assets and the largest UK heat network platform
Copenhagen Infrastructure Partners Fund IV, with significant UK battery storage assets and large Welsh renewables pipeline via Bute Energy
Intrinsic to largest-ever secondary solar portfolio transaction in UK history – Toucan. This gave our clients access to 177MW of South-West-located operating solar assets to meet their local objectives as well as repaying Thurrock Council >£500m. This transaction was >50% financed by GRI and other Greencoat clients, along with our clients forming Wessex Gardens
Funding the 1st electricity interconnector from the UK to Germany – Neuconnect – alongside Meridiam
Investments in 2 of the largest electricity transmission projects in US history – Champlain Hudson Power Express and SunZia
Coinvest in Somerset-based solar IPP, BSR, alongside a key equity sponsor partner of Brunel’s, ICG. BSR is targeting 60% biodiversity net gain on each project.
Coinvest in offshore wind turbine installation vessel company Havfram alongside Sandbrook, de-bottlenecking a key supply chain to future Renewable development
Investing in innovative infrastructure via Sidewalk Infrastructure Partners, developing future fit roads, carbon-negative data centres, plastics recycling, virtual power plants and next generation connectivity
Fibre broadband investments across regions via primary funds

Natural Capital investments as part of our mainstream 3rd Infrastructure vintage’s Climate Solutions portfolio – investing in sustainable forestry and agriculture:
Coinvest in 1.7 million acres of mixed hardwood forestry across central and eastern USA, transitioning to Improved Forestry Management practices, selling high integrity carbon credits and eliminating commercial forestry over time
Investing in organic farming with Clear Frontier, assisting traditional farms to convert to organic as well as sustainable agricultural practices and operating businesses. The soil has far greater capacity to absorb carbon than the atmosphere and trees. Natural Capital without a focus on soil is missing the biggest part of the solution.

Green shoots of affordable housing investment:

£150m invested into 1,365 English Affordable family houses and 321 apartments, across 29 schemes from Cornwall to East Yorkshire, with rents set at 22% of average local household income and EPC ‘B’ rating:
Creation of £65m Affordable Housing solution for Cornwall to invest locally in Cornwall
Plus, Brunel UK property portfolio investment into PGIM UK Affordable Housing of £85m alongside Greater Manchester and Merseyside as cornerstone anchor investors at first close
On their own behalf, to fulfil differing local impact objectives and with differing risk appetites, 4 of our underlying LGPS Clients (Wiltshire, Gloucestershire, Devon, Avon) have already collectively committed £445 million to 5 other Affordable, Social and Homelessness Housing funds. These sit outside of Brunel but show the great work done by our clients of their own volition

Other impactful investments from Brunel’s UK property portfolio:

£80m invested in the Octopus Healthcare Fund, providing high-quality care home residential accommodation
Cornerstoned with £78m invested in UBS Life Science Fund, investing in new UK Life Science labs, GMP and lab-enabled offices in Oxford, Cambridge, Stevenage and Potters Bar.
Includes the new Life Sciences hub to be delivered alongside GSK’s existing Global R&D facility and the vibrant ecosystem at Stevenage Bioscience Catalyst
Cornerstoned the £78m committed to Orchard Street Social & Environmental Impact Fund
£77m invested into M&G UK Residential accommodation

Significant UK property investment pooled for a lower cost:

UK property assets of £2.4 billion across balanced, specialist and long lease property funds
Removed multi-manager fee layer for 8 Clients
Rationalised >140 property funds down to a focussed portfolio of 14 funds, investing in UK affordable housing, residential, care homes, life sciences, industrial, office – all with a keen focus on sustainability as shown by improving metrics over Brunel’s tenure

Investing in UK businesses via private equity:

Investing private equity in UK businesses of all sizes, across the capital spectrum via buyout, growth and VC investments at various stages. We have distinct UK primary buyout funds in each vintage portfolio as well as pan-European buyout and VC funds, Global Secondaries and coinvests:
Vespa Capital 3 – notably Rock Steady Music School
Inflexion Buyout 6
Inflexion Enterprise 6
Atomico Venture 6
Summit Europe Growth 3
Summa Equity 3 – notably EA Technology
PAI Partners 8
Insight Partners 12
Insight Partners X Follow-on
Apax Global Impact 1
Apax 11
CVC 9
EMK Capital Partners 3
EQT Future 1
Verdane 11
CD&R 12

Lending to privately held businesses:

Brunel’s Private Debt program has focused on lending to businesses via Direct Lending funds, providing senior first-lien and uni-tranche loans to mid-market companies.
Commitments have been made to 15 different funds managed by 12 different managers.
The total amount committed is approximately £2 billion, with around £1.1 billion already invested.
The portfolio includes over 500 underlying companies, representing a high level of diversification.
Approximately 20% of the total amount is directed towards the UK.

Focus on sustainability:

We have done all of this whilst building globally diverse, risk-aware, sustainability focussed portfolios. We have pioneered an approach to assessing the sustainability of our Infrastructure portfolios by extending the FTSE Green Revenue methodology from public markets to private, allowing better top-down views for our clients. 83% of our infrastructure capital alone is invested in Renewables and other assets classified as Sustainable, according to the the FTSE Green Revenues methodology developed by FTSE Russell, and adapted to Infrastructure by StepStone.

We have an industry-leading property sustainability assessment framework from which we can conclude that:

All of our chosen UK funds have Net Zero aspirations, nearly half with a fund target date earlier than 2050
Three quarters of UK funds have a fund road map, and nearly 70% of the UK portfolio’s assets have an asset road map to reach Net Zero
Over half of funds measure embodied carbon and have strategies to reduce this as part of developments and refurbishments
Half of funds have set targets for Scope 1 and 2 emissions in line with science-based net zero pathway
UK funds selected have been improving their EPC ratings: EPC A-C has increased from 61% in 2022 to 71% in 2024, while those assets rated D, G or unrated have decreased from 12% to just 4% in the same time period
100% of chosen UK funds publish a DEI strategy/policy, provide DEI training and track DEI metrics. Over three quarters set DEI targets and disclose DEI metrics
Within the international portfolio, over three quarters of funds have a corporate road map to net zero, and a third have a fund road map
All chosen international funds are UN PRI signatories, and over half are classified Article 8 on SFDR