Dan Berger, director of Property & Funds at Delancey Real Estate examines how the growing importance of pools in managing LGPS assets can benefit the public-to-private knowledge transfer in real estate investment.
Unlocking Growth: The Role of Pension Capital in UK Real Estate and Economic Renewal’, will convene influential stakeholders across the public and private sector, including key figures from the UK pension fund ecosystem, as well as UK Government representatives to discuss capital deployment within regeneration and development projects. Find out more about the event here.
The UK’s Real Estate Investment & Infrastructure Forum (UKREiiF) has firmly established itself as the premier UK real estate conference, excelling in its ability to bring together the public and private sectors. Such events are of critical importance to the UK economy: optimised public-and-private collaboration can deliver economic growth and employment while meeting social and political objectives such as reducing regional inequality.
Within a real estate context, public-private partnerships have typically focused on combining public land with private capital to advance new developments or regeneration projects. While this approach is both vital and demonstrably successful, the potential for collaboration extends beyond this model to include knowledge transfer, allowing both sectors to harness each other’s expertise for even greater impact.
The rise of Local Government Pension Schemes (‘LGPS’) pools provides one example of where private-to-public knowledge transfer can deliver financial benefits for both sides.
Delancey Real Estate’s experience as an investment and asset manager that has partnered with large global pension funds has taught us that, as they grow, they become increasingly demanding on behalf of their members, seeking more bespoke solutions that align with their specific goals and values. So, unlike the smaller local authority funds they have replaced, these new LGPS pools will have distinct requirements and a more strategic approach to investment, reflecting their scale and ambition.
This shift in scale will empower LGPS funds to imprint their own principles and standards on how their assets are managed – for instance, by ensuring that investment managers adhere to their responsible investment strategies.
The UK real estate portfolios of many smaller local authority pension funds have under-served by external management. Common issues include:
- Over-diversification, which dilutes returns
- Passive asset management, resulting in missed opportunities
- Reluctance to divest underperforming assets
- A one-size-fits-all approach, failing to address specific needs
Performance issues like these, which have been heightened by the latest cyclical downturn colliding with structural changes in the real estate market, underscore the need for UK real estate investment managers to deliver a more compelling value proposition -one that meets the evolving demands of an increasingly discerning client base.
While there has historically been a tendency for local authority pension funds to retain underperforming managers, this practice is no longer sustainable in a world of increasing scale through pooling.
Larger pension funds typically have larger internal teams equipped with the resources and expertise to provide rigorous oversight of investment managers. This structure not only enhances accountability but also allows pension funds to intervene promptly if investment managers underperform. As LGPS pools continue their journey, we expect to see greater implementation of oversight and accountability measures, driving a necessary shift toward higher performance standards and better outcomes.
The related dynamic that will become prevalent is the rationale for internalising the management of their portfolios. This will be an evolution as the funds achieve a size that underpins the feasibility of building an internal team to replace investment managers. These funds are at the beginning of their maturation, based on the Thinking Ahead Institution P&I 300 ranking, the biggest UK LGPS would rank at around number 85 globally. This will be an evolution, and those funds will benefit from leveraging the expertise and experience of investment managers to support their transition.
Flexible investment managers capable of delivering tailored solutions will be essential in supporting LGPS funds as they work toward developing in-house capabilities. These ‘transition’ managers can play a pivotal role by establishing high-quality seed portfolios and assisting internal teams with key functions such as deal sourcing, asset management, and responsible investment practices – core competencies required to manage a direct real estate portfolio effectively. Over time, as the funds build the necessary expertise and resources, they will be well-positioned, if they choose, to transition to a fully insourced model, reducing reliance on external managers.
This journey has been travelled by larger global pension funds. We are working with a large global pension fund who was seeking a tailored solution that brings together their capital and capability alongside our expertise to acquire and manage UK real estate. As they continue to grow there might be a tipping point where they would like to internalise the full capability, we will work with them during that transition to ensure they are successful.
Closer collaboration between LGPS funds and private investment managers will enable them to achieve outcomes tailored to their specific needs. Given the geographical focus of LGPS funds, this partnership can facilitate targeted local investments. By incorporating private investment expertise, these local opportunities can be rigorously assessed against other market options, ensuring pension members returns are not compromised. This approach also ensures that uneconomic projects are not pursued solely based on their geographical location, maintaining a disciplined and strategic investment process.
The evolving landscape of UK pension capital presents a compelling opportunity for public capital to collaborate with private sector expertise, with the potential to deliver significant benefits for pension fund members, local communities, and the broader UK economy. The most successful outcomes are likely to emerge from strategic partnerships that effectively combine the strengths of public sector capital and private sector expertise. This collaboration can also extend to knowledge transfer, supporting the establishment of internally managed teams if desired. Funds that establish effective partnerships with private investors will be best positioned to achieve the strongest outcomes for their members.
Delancey is an independent investment, asset, and development management business specialising in UK real estate. Investing across the risk/return spectrum, Delancey enables its clients, which include pension funds, endowments, sovereign wealth funds and family offices, to access opportunities in UK real estate via equity, debt, public markets, platform creation, and strategic partnerships.
