The £970m income fund with added social benefits.
Willis Towers Watson recently launched the Secure Income Fund, which invests in a range of income-producing real assets from ground rents to renewable energy. It is a good example of what Elizabeth Corley, vice-chair of Allianz Global Investors, describes as an investor that is finance-first but is looking to have a social impact.
The fund was designed to help UK pension funds match their sterling-denominated liabilities – it had raised £970m (€1.1bn) as from March. “We are in the business of generating long-term, risk-adjusted returns,” says the fund’s manager Duncan Hale. “As part of that we very much view having a social benefit as having a significant way of reducing that risk.”
The fund does not have a mandate for social impact, but “when we talk to investors, it really resonates with them”, says Hale. The fund is investing, for example, in social housing specifically for people with physical or mental disabilities. Hale says this is lower risk than traditional social housing investment, but also provides better returns, due to an acute supply-demand imbalance.
About 450,000 people in the UK require such specific accommodation but there are only 60,000 suitable residential units. “There’s a real shortfall,” says Hale. “Because it’s harder work you are generally getting better returns, [and] you are providing social good as well.”
The fund also invests in ground rents, an area of the real estate market that became mired in controversy last year after it emerged that a growing number of newly built homes were being sold with ground leases that doubled every year. Hale said he “had a number of conversations” with existing and prospective investors about “the reputational issues associated with ground rents, particularly on the back of what came out publicly this time last year”.
Hale says the partner that Willis Towers Watson is working with had already identified the issue before it came out in the press and they had sought to address it. “They had bought a small number of ‘doublers’ as part of a much broader transaction they had been part of,” Hale says. “But they had been working with affected leaseholders to minimise the impact of that.”
But there is a logic – both financially and ESG-driven – to not walking away from areas of the market just because they have become tarnished by bad practices.
“There will be issues that come up from time to time in this area,” says Hale. “Just keeping away from them is not the right answer… but addressing the issue – in this case with ground rents or whether it be talking to your public-sector counterparty in social infrastructure – is critical, and important to access deals.”
He adds: “There are finite assets in the marketplace. Simply saying I’m not going to invest in this area because of this and this area because of that is… leaving a lot of value on the table. It is often in the areas where there is a lot of noise where you are getting the best value.”