The importance of good governance in alternatives

Success in private markets investment relies heavily on having the right level of governance, according to Padmesh Shukla, chief investment officer of the £14.5 billion Transport for London (TfL) Pension Fund.

“If you can’t have the right governance and the absolute focus on it, don’t do it, because it’s not a quick fix that will give you a sort of alpha overload,” he told delegates at the Pensions and Lifetime Savings Association’s (PLSA) investment conference in Edinburgh this week.

The TfL Pension Fund has roughly 50% of its assets allocated to alternatives, with 30% in private markets – a quarter of which is in private credit.

In a response to a question about how schemes deal with consultants, Shukla again emphasised governance. The TfL scheme has been with just one manager for a long time, he said, but that relations with any consultant are only as effective as the scheme is in working with them.

“There’s a very easy habit of blaming consultants, but I don’t think the problem is with them,” said Shukla. “The problem is actually more about the way we see consultants. It should be a partnership, in which we set the goals… but it’s always good to have someone challenge you.”

Dan Mikulskis, CIO of the £25 billion People’s Partnership master trust, explained that while his scheme has traditionally been an index investor with no exposure to private markets, it is looking to broaden its investment allocations this year.

“We’re looking at fairly conventional liquid fixed income, but there’s a lot of interesting things to do with it,” he said.

Bonds may be back in vogue due to rising yields, said Mikulskis, but schemes must think about where they want to be on the curve for credit – short, medium or long dated – as well as about the role of duration in a DC scheme, the role of assets as volatility dampeners, and how fixed income forms a major part of pre-retirement portfolios.

“There is a lot of work to be done in the DC market as to how we approach fixed income, particularly around the crucial point of decumulation,” he said.