Set up in 2010 as part of the government automatic enrolment programme, Nest provides a DC workplace pension scheme to over 12m UK workers. It currently boasts £33bn (€37.8bn) of assets under management that is growing by £450m per month. ESG lies at the heart of its investment strategy: it believes that well-run organisations with sound environmental and social practices have a better chance of long-term success and profitability.

The first UK DC master trust to make a substantial commitment to private equity, Nest focuses on a growth strategy to provide capital to support unlisted companies in growing their operations. It identified this space as one which could provide attractive returns while deploying significant capital and avoiding many ESG and other risks associated with large leveraged buyouts. A key objective is to exert a more concentrated influence on the companies it invests in, improving ESG standards within the private equity world.

An innovative mandate structure which avoids paying performance fees and carried interest is used to manage the private equity allocation. Nest believes that performance fees detract from results and that without them, likely net returns will be at least as good, if not higher, providing high quality managers are [not clear]. Nest’s predictable and substantial capital commitments have allowed its managers to scale up their co-investment programme, gaining access to a wider range of attractive investment opportunities.

One barrier to DC schemes investing in this space is managing an allocation to highly illiquid assets within a default fund, or fund range, where members expect to see daily pricing and to be able to switch in or out when they please. Nest’s strong positive cashflows, very high participation in the default fund and creation of an internal market for trading illiquid investments between member funds means it can manage illiquidity and other operational risks.