Barry Kenneth (Photograph by Anthony Collins)
Barry Kenneth, CIO of the U.K.’s Pension Protection Fund, joined CIO executive editor Amy Resnick in a webinar on June 26.
The PPF guarantees the security of private sector pension funds in the U.K., similar to the Pension Benefit Guaranty Corporation in the U.S. The PPF manages the assets of insolvent pension plans and provides benefits to their beneficiaries.
The PPF manages 32 billion pounds ($43.86 billion) in assets, covering 292,000 members.
Watch the full interview here, where Kenneth discusses investing in infrastructure, the macro impacts on various asset classes, and more.
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Investing More in Alts, Infrastructure
Under the Mansion House Accord and the pension bill that is making its way through the U.K. legislature, the U.K. government wants the country’s pension funds to invest more in alternative investments like private equity and infrastructure, while consolidating multiple local defined contribution schemes into larger ones.
“Most Western economies around the world are underinvested in critical infrastructure as well as other assets over the last 15, 20 years,” Kenneth said.
The expectation in the Mansion House Accord is that 5% of defined contribution assets will go into domestic private market investments, and 10% of assets will be allocated to alternatives overall. The U.K. Treasury Department’s expectation is that $50 billion go into these investments by 2030. Kenneth reflected on how likely this is, and what infrastructure projects could be included.
“In order to get these infrastructure opportunities available for investment, it’s not just trying to say that we want you to invest in infrastructure. To get an investable proposition takes time, and I don’t think there’s a wealth of opportunities there,” Kenneth said.
He points to two specific projects that are interesting, the 14-billion-pound Sizewell C nuclear plant, and the Lower Thames Crossing, a road and twin tunnels under the Thames River, east of London. But some of these projects have been in development for years.
“Planning [is] a huge problem in the U.K.,” Kenneth said, pointing out that work on the Thames Crossing project kicked off in 2008 and got planning permission in March. Construction could start as early as 2026, with the new road expected to open in the early 2030s, according to the U.K. National Highways department.
“The movements that they’re making are obviously in the right direction in order to try and boost equity capital, which is obviously the best form of growth capital in the U.K., the challenge is getting the projects into an investable place, and getting the right capital allocated to the right projects,” Kenneth said.
The PPF invests in infrastructure globally. Kenneth says the fund, in its infrastructure portfolio, aims to achieve returns of 10% or more on infrastructure investments.
“If you take the infrastructure asset class, you’re looking for, based on global returns… on the unlevered side, [easily] between 10% and 12%,” Kenneth said. “And if you put a little bit of leverage on top of that, you can easily get to mid-teens.”
Not the kind of returns investors could get three, four or five years ago, but as more governments are investing capital in infrastructure projects, the asset class is becoming more lucrative. “I’m not really looking for 15 to 20 [percent], but certainly something north of 10,” Kenneth said.
Being Nimble
Kenneth stressed the importance of always being aware of the trends and risks affecting the portfolio.
“It’s not just about the risk of … a single point in time, because about 50% of our growth portfolio is in private market assets,” Kenneth said. “So it’s not assets that we’re likely to be able to unwind…very quickly if something changes … If you look at this model, at the moment, you know, there’s certainly parts of the world that I would say are difficult to invest into, such as China, it’s a big part of the global GDP, but it’s a tough place for us to invest.”
That is among the reasons why the U.S. continues to be a “sweet spot” for the PPF, he said.
He also noted that holding cash can afford the PPF flexibility. The portfolio has a 6% allocation to cash, about half of which is held as collateral for fund’s derivatives exposures. But the rest of the cash helps the fund capitalize on opportunities. “If we need to maneuver around the portfolio … we have quite a lot of governance flexibility and … if we see advantages in the market or, dislocations in the market, then we would use that in order to allocate there,” he said.
In terms of additional asset classes, Kenneth said the PPF sees value, at the moment, for strong risk-adjusted returns in global infrastructure, private credit and real estate.
“I think it’s going to be very much opportunistic real estate, combined with certain sectors. Real estate is something we’ve been under-allocated into for the last three or four years,” he said. “That’s something that opportunistically we will look to our models, [which] will tell us that real estate looks attractive.”
He pointed to the “more esoteric” real estate assets, including alternatives and logistics, rather than offices or retail space.
The Impact of Macro Trends
Geopolitical conflict, shifts in interest rates and monetary policy have made some asset classes more attractive than others, Kenneth said.
“Even within riskier fixed income, now you’ve got a yield to base everything from that is relatively attractive, certainly at the shorter end of yield curves,” Kenneth said. “If you look at even corporate credit from a yield perspective, I know that spreads are tight, but these types of things would feature more on your asset allocation now than they would have done a few years ago.”
The PPF, like many global investors, has a high allocation to U.S. assets. But tariffs and policy uncertainty have given investors pause and is prompting reassessment of their U.S. allocations, while eyeing global assets.
“I’m not going to say that it hasn’t caused some [disruptions] in terms of how we allocate and how we’ve tried to maneuver our way through the recent tariffs,” Kenneth said.
There are parts of the world in which it is difficult to invest, he noted, but the U.S. has growth and historically has had an element of stability. But there will also be more opportunities to invest elsewhere, like Europe, including in the defense sector, with some caveats, he said.
“For funds like ourselves, or many other asset owners on the call, it depends on which part of defense that you can invest in,” Kenneth said. “If it’s, it’s cluster bombs and munitions, it’s obviously something that you would classify as non-investable for [investors] like ourselves…But the short answer … is yes, but it’s going to be very much based on the proposition that comes up.”
Kenneth also noted that the so-called Section 899 “retaliatory” tax provision of President Trump’s tax and policy bill could “impact how [the PPF allocates] to the U.S. moving forward,” just days before the provision was dropped from the pending bill.
“I do think that there will be more opportunities in Europe moving forward than there previously has been,” Kenneth said. “So, I do think that we could probably, if we needed to, allocate a bit more capital from the U.S. into Europe, if we deemed that the most appropriate thing to go and do.”
Still, the easiest place to invest, Kenneth said, is the U.S.
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