Two of the UK’s biggest pension funds have made strong commitments to lend to companies unable to access loans from banks in the credit crunch.
The West Midlands Pension Fund, which was last valued at £7.4bn (€8.2bn, $10.8bn), has made a firm commitment to the M&G UK Companies Financing Fund which hopes to raise £2-3bn.
Nigel Labram, head of the executive arm of the £39bn BT Pension Fund at Hermes, has confirmed a specific interest in the M&G fund and other similar funds.
The M&G fund will aim to lend tranches of £100m to between 20 and 30 companies, charging Libor plus 4-6 per cent for an initial period of five years, which can be extended to 10 years.
The fund is seeking 12-year commitments from investors and has raised £1.3bn since December, including an initial £500m investment from the life fund of Prudential, M&G’s parent.
Investors will also be given an “equity kicker”, a payment linked to the growth in share price of the companies that receive the loans.
Judy Saunders, chief investment officer of the West Midlands Pension Fund said: “The concept of earning an attractive return by lending to financially viable companies is appealing, especially as there is also an equity element that should over the long term ensure an alignment of interest between borrower and lender.”
Mr Labram is more cautious: “These guys [M&G] are interesting but it would be too early to say that we have committed to it as we have not taken it to the trustees for specific approval. It seems to be a way that pension schemes can sensibly use their liquidity and size in this market when there is a banking disruption.
“If we can facilitate the normal course of business but through a different means that makes perfect sense for us. So we are looking at this and a number of other opportunities.
“The thing that we have to be careful about with corporate exposure is that these funds are high yielding for a good reason - there may be additional risk. This is another reason why using sophisticated intermediaries [such as M&G] makes perfect sense for us.”
Get alerts on Pensions crisis when a new story is published