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A look inside Greater Manchester Pension Fund’s impact allocation

The £22bn pension is meeting its 5% local impact target with low-return venture investments and affordable buy-to-rent homes.

The £22 billion ($29 billion; €26 billion) Greater Manchester Pension Fund is “taking advantage” of large private equity firms and banks “leaving local financing” to execute its impact strategy.

“Many years ago, you’d see regional offices of [firms such as] 3i and Apax. You don’t see those firms now at the local and smaller level,” Paddy Dowdall, assistant executive director at GMPF, told attendees at a Local Government Pension Scheme private markets webcast last week. “Some of the things we’ve been able to do is to seed funds and replace that… replace banks.”

GMPF has a 5 percent impact allocation that “promotes economic development [in the Greater Manchester area] by place-based impact investing,” said Dowdall. Its strategy includes direct and fund investments. Recent investments out of this allocation include commitments to Beechbrook’s £120 million third UK SME credit fund and UK private equity firm Foresight’s third Regional Investment Fund, which has raised £65 million, according to affiliate publication Private Equity International’s database. “We use national managers because the quality of investment management is really key in these things to make sure that they deliver the returns. A common execution theme is to invest in a national fund but insist on a local side vehicle.”

Venture investments are one component of the pension’s allocation. “That’s been reasonably successful at a lower scale and it’s something that we’re looking to increase over time,” said Dowdall. “A lot of this is providing investment into third sector provision of public services. We can find investments in third sector charities that receive government funding for programmes that have a positive impact and provide a reasonable risk-adjusted return for our investments. Returns might be on the lower side, and in terms of the risk factors there’s a low creditworthiness, [but] the sponsor and source of funds is often government funding.”

Decent and affordable homes

Buy-to-rent housing is another component of GMPF’s impact allocation. “People need a decent and affordable home in a pleasant environment,” said Dowdall. When the pension fund considers investments, “We look at what the rent would be against incomes for key worker jobs. An individual or a couple could afford to live in these properties without it taking all of their income.”

This is “affordable with a small ‘a’ housing, privately owned and managed, rather than ‘Section 106 Affordable Housing’,” which is provided by UK local councils and authorities to eligible households at below-market rates. “I’m not really convinced that pension funds are the correct source for what I’d call ‘pure’ Section 106 affordable housing,” said Dowdall. “That has a cost of capital that is below what we need to meet our pension fund returns. There’s a need for good quality rented accommodation by individuals who wouldn’t necessarily qualify for Section 106.” GMPF prefers providing mezzanine debt, said Dowdall: “Senior debt is often priced at a level that is below our return expectations… and equity requires a greater bandwidth in terms of oversight of the project. On a risk-reward basis, we have found mezzanine debt to be a good place to be overall.”

Improving the local economy

“Our decision [to create this allocation] many years ago was a political one in terms of strategy. We want to invest it locally where possible,” Dowdall said. “It has the clear aim of targeting these underserved markets to improve the economy. Greater Manchester is behind the UK national average and has aspirations to be at least the national average. And there is an impact needed on certain social and educational factors. We also have softer aims to promote health, well-being, education and skills and supporting sustainable living… We’ve also added social impact in terms of preventing homelessness and providing services to teens who have fallen behind in educational attainment.”