Why this building society giant’s pension fund dislikes secondaries

Not everyone is convinced about the benefits of investing in secondaries, according to the chief investment officer of the world’s largest building society’s pension fund.

Mark Hedges, who oversees investments at the UK’s Nationwide Pension Fund, said its trustees turned down the opportunity to invest in a secondaries fund because they saw it as an unnecessary barrier between the pension’s capital and the underlying private equity funds.

“There isn’t really operational improvement going on here – [the return is] all in the underlying funds,” he said. “[They saw] what was on offer as just an intermediary for a pool of funds, which is the same reason we don’t do funds of funds … They didn’t really feel there was enough value for that fee.”

The £5.5 billion ($7 billion; €6.6 billion) fund is the employee retirement scheme of the Nationwide Building Society – a mutual financial giant with around £250 billion in assets on behalf of almost 16 million members.

The investment team believed the investment could help quickly build the pension’s private equity exposure while mitigating the J-curve. “In the end, the trustees didn’t like it”, Hedges added.

LP appetite for secondaries funds has dropped over the past year, according to sister title Private Equity International‘s LP Perspectives Survey 2020. Fully 47 percent of LPs polled in 2018 said they planned to commit to such funds in the following year, compared with 33 percent last year. More LPs (43 percent) do not plan on committing to secondaries this year than do, the survey also found.

Nationwide has opportunistically used the secondaries market to increase exposure to funds it is already invested in, though it will never be a regular buyer, he said.

“In the future, as we de-risk the fund, we might occasionally look to sell out of residual positions,” Hedges said, adding that it had no firm plans to do so.

Around 20 percent of Nationwide pension fund’s assets are allocated to “return-seeking alternatives” such as private equity, private credit, real estate and infrastructure, he said. It also has an allocation to asset-matching alternative investment such as non-leased property and affordable housing.

The pension primarily backs niche buyout and growth funds, writing tickets of £35 million to £50 million.