NEST taps Schroders Capital for growth equity push

The £24bn defined contribution pension's first-ever PE mandate will make up to 10 investments in small and mid-cap companies.

The National Employment Savings Trust, the UK’s largest defined contribution pension, has selected Schroders Capital as its first-ever private equity manager, as part of its £1.5 billion ($1.9 billion; €1.8 billion) push into private equity by early 2025.

The £24 billion defined contribution master trust launched its manager selection process in August, of which 14 fund managers applied. The procurement process follows nearly 18 months of market engagement, Private Equity International previously reported.

Commenting on the appointment, Mark Fawcett, NEST’s CIO, said the move could be a “watershed moment” for the private equity industry in helping make it accessible for average savers.

“Many UK workers, for the first time in their lives, will now have the chance to benefit from investing in private equity,” Fawcett said in a statement. “We’ve never accepted that any type of investment is out of reach for our members. We want every tool in our toolbox to boost the risk-adjusted returns for our members.

Fawcett noted during a press briefing on Tuesday that investing in private equity “completes” the pension’s private markets portfolio.

“We’ve only been able to do it because of the scale we are in now… We have £5 billion coming every year and that means we can have a sensible discussion with the likes of [Schroders Capital]. We can supply this cashflow, you can deploy it in these amounts, and we can agree… what probably for Schroders [is] a more difficult fee to swallow than some of their other clients.’”

NEST and Schroders did not provide further details on the fee structure and the return target for the vehicle. It is understood, however, that the pension is not paying the traditional two and 20 model.

Fawcett said during the briefing: “We don’t want to and can’t afford to pay double fees. What we bring to Schroders Capital is that high level of capital, so they can take a bigger share of co-investments and often be the sole co-investor with the fund.”

Private equity’s high fees have been the main hurdle for DC pensions to allocate capital to the asset class. In an interview with the Financial Times in April last year, Fawcett said the fund “won’t pay two and 20” and argued that the level of fees charged by most private market funds will remain “too high for many DC pension schemes to access”.

Growth equity focus

With NEST’s capital commitment, Schroders will set up an evergreen vehicle that will make direct investments and co-invest alongside managers it has previously backed.

Schroders Capital, the $74.9 billion private markets unit of Schroders Group, invests across private equity, secondaries, venture, impact, real estate, infrastructure, securitised products and asset-based finance, private debt, and insurance-linked securities. It has backed PE managers including G Square, Miura Partners and True, PEI data shows.

Capital will be invested in growth and mid-market deals in North America, Europe and the UK, and developed Asia. Target industries include financials, consumer, technology and healthcare. Typical ticket sizes are between £10 million and £50 million, and the firm expects to make up to 10 investments over the next two to three years, Tim Creed, head of private equity investments at Schroders Capital, said.

Fawcett added: “This isn’t about big [leveraged buyouts]. We won’t be investing in Twitter or Asda. This is to drive growth for smaller companies around the world, which are investment opportunities we can’t get in the listed markets.”

Capital will be deployed via a “bespoke and scalable” evergreen limited partnership structure, according to the statement. Schroders will provide valuations of companies it backs via the vehicle on a monthly basis, which will fall under NEST’s overall portfolio.

Schroders Capital’s mandate is part of NEST’s Retirement Date Funds, the pension’s default investment strategy for its 10 million members. NEST’s Retirement Date Funds have “performed well”, according to its 2020/21 annual report. The 2040 fund, for members expecting to retire in 2040, delivered 28 percent over one year and 9.8 percent annualised return over five years to 31 March 2021.

NEST will not be invested in any third-party funds through its relationship with Schroders.

NEST’s move represents the first major expansion by a DC pension fund into unlisted assets. The pension has been steadily growing its private markets exposure in recent years: it began allocating capital to private markets in 2019, starting with private credit, and has backed funds including BlackRock GBP Infrastructure Debt Fund and BNP Diversified Private Credit Fund. It started investing in infrastructure equity last year, committing capital across three mandates including in Octopus Renewables Infrastructure.

The pension fund expects to allocate up to 5 percent of its total AUM, or up to about £1.5 billion in private equity, in three years’ time. It has a 20 percent allocation to private markets across PE, real estate, private credit and infrastructure.

“I don’t think we’ll stop at 5 percent for PE, but that’s our initial target,” Fawcett said.