The UK’s defined benefit (DB) £16.3bn (€19.7bn) lifeboat fund is set to increase its exposure to the growing energy market, tendering a £500m private equity mandate.

The Pension Protection Fund (PPF) said it is looking for a manager to handle £400m-500m in allocations to the US oil and gas sector while also investing in renewable energy.

The US has in recent years seen significant growth in the field of hydraulic fracturing, or fracking, a method whereby natural gas is extracted from lower layers of sediment after it it flooded with a blend of water and chemicals. 

Asked if the mandate could include exposure to fracking, a spokeswoman for the PPF would only say it would look at “all options” presented by fund managers.

The investment will form part of the fund’s alternatives allocations, which has a strategic allocation of 22.5% after the fund overhauled its investment structure earlier this year.

At the end of March, the PPF had £444m, or 2.7%, in private equity, with a strategic allocation of 4% to the asset class.

It said it wanted to appoint two or three managers as part of a framework agreement investing in  energy or related companies, mainly in North America and OECD countries.

The agreement is expected to last around four years with the possibility to extend this by a further four years.

Interested fund managers must have a targeted fund size of over $400m (€308m) with close to 80% of the fund allocated to traditional energy investments, or closely related holdings.

The move by the PPF comes after it delivered a marginal negative return over the last financial year after its liability-driven investments (LDI) dragged down returns.

It suffered a negative 0.7% return on overall investments which rose to 3.4% after stripping out the fund’s LDI book.

Earlier this year the fund overhauled its investment structure changing from holding 30% in risk assets to a more dynamic approach.

It will now allocate 58% to LDI strategies, 22.5% to alternatives and 12.5% to hybrid assets that both provide risk exposure and match liability payments with inflation expectations.

It transferred some of its property holdings into the hybrid portfolio, thus decreasing what assets came under its alternatives banner.

The fund’s move into private equity holdings in the energy sector come after it also made moves to enter the direct lending space, and threw its weight behind smart beta.

In January this year, it announced it would begin lending around £150m to UK corporates as it searched for two managers to manage the mandate.

It also changed the strategic benchmark for its equity managers from a market-capitalisation approach to a smart beta minimum volatility method.

Topics