That’s because most schemes will pay their insurance premium in cash, gilts, and possibly investment-grade publicly-traded corporate bonds if the scheme’s holding the right credit investments.

Private assets are rarely in the mix in the pre-transaction phase. Schemes tend to avoid them for liquidity reasons, amid perceptions that these are complex, long-term, and somewhat inaccessible assets.

But are schemes missing out by overlooking private asset opportunities? Contrary to popular perceptions, these assets are easily accessible and navigable with the help of an experienced investment manager.

In our view, one subset – investment-grade private credit - is particularly well-suited to DB schemes on the path to buyout. Given an asset manager with relevant investment and pensions expertise, an allocation to this debt category has the potential to add significant value for schemes in the pre-buyout years.

Should you consider investment-grade private credit for your scheme? In this article we’ll address this question, discuss two key opportunities for buyout-aware DB schemes, and outline the respective benefits of these strategies.

Finally, if you’re planning to transact in the not-too-distant future, what are the considerations for choosing an investment manager? Read on to find out.

Why investment-grade private credit?

Let’s start with a look at the attractions of this unlisted debt-based investment category. Simply put, this high-quality subset offers investors the potential for greater yield and lower risk relative to similarly rated public bonds.

The yield premium versus public credit is partly explained by complexity and illiquidity. As we’ve mentioned, schemes have traditionally found these two characteristics unappealing in the period preceding buyout. 

However, asset managers with pensions and private credit expertise can help you take advantage of higher yields. The right manager can customise your portfolio, creating an investment-grade private credit mandate that works for your timeline, or even a range of cashflows to meet your profile.

What’s more, these investments also offer exposure to economic drivers generally not available in the public credit markets. This enhances diversification and helps to manage risk at this important stage in your pension journey.

Which strategies could help you?

Private credit strategies include fund finance, infrastructure debt, commercial real estate debt and private corporate debt. We believe the latter two are well worth thinking about in the lead-up to buyout.

This table sets out the key characteristics of commercial real estate debt and private corporate debt investments, demonstrating the yields available. It’s based on our portfolios: 

As we can see in the table, yields are compelling compared with public debt. It’s therefore possible to structure an investment-grade private credit allocation spanning both strategies with a target yield incorporating 100-150 basis points of illiquidity pick-up versus public credit.

The right place, the right time?

So, given interesting yields and comparatively low risk versus public credit, should your scheme consider investment-grade commercial real estate debt and/or private corporate credit?

A lot depends on your time horizon. If your horizon’s long enough, you could invest in private credit assets, let them mature naturally, and secure additional return in time for transfer.

When working out your timeframe to buyout, it’s worth looking at factors beyond financial position, such as the following: 

If, after thinking about these factors, you think it will be three years or more before your scheme transacts, then it’s worth considering these two private credit strategies.

As we can see in the table above, underlying holdings within these asset classes can have tenors as short as two or three years.

This is what makes it possible to structure an investment-grade private credit allocation so that it matures in line with your timeframe to buyout, avoiding the need to dispose of holdings before transacting. 

Furthermore, some fund structures now offer liquidity. For example, if you’re working to a three-year time horizon, it’s possible to invest in a fund that offers liquidity at the three-year point.

Final thoughts

A modest allocation to investment-grade private credit has the potential to add value to your portfolio ahead of transfer, while enhancing diversification and reducing risk.

An asset manager with private markets, insurance and pensions expertise could be well-placed to help your scheme derive value from this specialist opportunity set and structure your investments to maximise liquidity in time for buyout.

Contact us

Our Insurance and Pensions Solutions teams have the expertise to help clients manage their portfolios as they approach and execute a transfer.

If you’d like to find out more about our Buyout Ready investment solutions or our Private Credit capabilities, contact us at ukinstitutionalall@abrdn.com.

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