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Survey reveals surge in UK local authorities eyeing up private markets

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Published: 20 February 2024

71% of investors said they plan to increase allocations to private markets, showing a growing interest in sustainable and climate-related investments and those with a local focus including social infrastructure and housing.

Terraced houses in contrast to council housing blocks in London
Local government pension schemes in the UK plan to increase allocations to the housing and social infrastructure sectors | Tower Hamlets, East London by Viktor Huang / iStock

The UK’s £360bn Local Government Pension Scheme (LGPS) sector is inclined to move toward private markets, sustainability and local investing, according to a survey carried out by Room151 under the sponsorship of Schroders.

Despite improved funding ratios and higher returns on cash, 71% of investors said they plan to increase allocations to private markets, at the expense of listed equities and government bonds. Nearly half of survey respondents said that there was a case for investments in social infrastructure including investments in education and healthcare. 

LGPS investors also appear keen to branch out to other sources of portfolio diversification, amid a breakdown of the negative correlation between bonds and equities.

Sustainability and more local focus

The growing investor demand for private markets also coincides with an interest in sustainability and climate opportunities, according to the report’s findings. With 59% of respondents saying they were on the lookout for new climate and natural capital solutions, while over half said they were planning to invest more into renewable infrastructure. 

In terms of sectors, residential housing appeared most popular for levelling up investments 74% of survey respondents expressing interest, followed by renewable infrastructure. The ‘levelling up’ agenda is a UK government scheme aimed at tackling regional inequality, and one which it hopes local impact investing will help achieve. 

In addition, a lack of scalable local opportunities that can meet the funds’ return targets was a major concern for 61% of respondents.

Scepticism among investors on whether the UK offers the most attractive investment opportunities was also revealed, with 75% of investors saying that better opportunities could be found abroad, while only a quarter believed the LGPS should focus on investment in the UK.

However, despite this, 64% also said they expected to increase investment in local opportunities that support levelling up or create a local beneficial impact. 

Paul Myles, head of LGPS at Schroders, said: “I was surprised that the appetite for local investment was not as strong as I thought it would be. Two-thirds of the respondents believe that levelling up should be a consequence of investment strategy rather than a requirement imposed by central government.” 

Appetite for collaboration  

The survey results also revealed an appetite for collaboration among different schemes, showing that LGPS practitioners have largely adopted pooling and are keen to align investments with net zero and levelling up goals. With financial objectives remaining primary to investment decision-making, regardless of political priorities.  

Additionally, more than a third of respondents backed the consolidation of LGPS assets but thought the ‘magic number’ of pools lies somewhere between two and seven.  

While 77% of respondents believe performance and financial benefits of pooling outweigh the set-up costs. 

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