BlackRock targets real estate debt for UK DB fund

BlackRock has launched an alternative income fund targeted at UK defined benefit pension schemes through which it will aim to invest in UK real estate debt.

The US investment management firm said that it was raising the fund at a time when defined benefit pension schemes are seeking alternative income due to low yields from traditional asset classes.

The semi-open ended UK Strategic Alternative Income Fund will aim to deliver a 5 percent net annual yield by building a portfolio of debt and equity assets. Alongside real estate debt, the fund will also target infrastructure debt, renewable energy, long-lease property and direct lending in the UK market.

BlackRock declined to specify a target size for the fund or an expected time-frame for a first close. It is understood that the firm anticipates a fairly even split between debt and equity investments, although allocation guidelines will be flexible.

The fund will aim to create long-term stable cash flows with explicit and implicit linkage to inflation. Investments will be made through a mixture of fund investments, bespoke mandates and direct transactions. Investors will be provided with windows of liquidity each year, following an initial four-year lock-in period.

“UK pension schemes are increasingly embracing less liquid strategies to enhance returns, but these types of investments are not often easy to exploit. By creating a single portfolio that provides exposure to a range of alternative income sources we are helping schemes access these markets more easily while also providing diversification,” said Andrew Stephens, BlackRock’s head of intermediated clients for the UK.

“The strong asset returns we’ve seen since 2009 haven’t fed through to improved funding levels for defined benefit pension schemes and forward looking returns from public markets alone won’t meet their objectives. With many schemes’ recovery plans being in excess of 10 years, the illiquidity premiums that schemes can source from private markets are compelling and UK pension schemes, with their long investment horizons, are ideally positioned to benefit,” Stephens added.