• New allocations follow switch to defensive in response to macro upheaval
• Pension fund looking to add to its 60-plus GP relationships in private markets
• Initial private credit commitments expected within six months

The United Nations Joint Staff Pension Fund (UNJSPF) is in the early phases of launching new allocations for venture capital and private credit, Pedro Guazo, the fund’s CEO, told Mergermarket – a result of concerted efforts to reduce risk in its equities and fixed income exposure.

The UNJSPF, a defined benefit scheme with USD 88.8bn in assets under management (AUM), credits the USD 30m growth in its portfolio over the past three years to the employment of a conservative yet flexible strategy. However, a routine asset-liability management study last year determined that a “radical” overhaul was required in response to the higher interest rate environment, according to Guazo.

“We’re always trying to find an asset allocation that allows us to get 3.5% in the long term,” said Guazo, referencing the UNJSPF’s 15-year real rate of return. “With these new capital market assumptions, we can get there with less risk.” The 2023 study, conducted by consulting firm Ortec Finance, found that increased fixed income exposure would better position the fund in response to current interest rates. At the same time, it warned that the UNJSPF may have to look elsewhere for returns in the long term as spreads compress.

Creating a more defensive portfolio was crucial given how inflation and subsequent interest rate hikes had impaired recent performance. Net assets shrank by 15% in 2022 – the biggest correction since the global financial crisis – as double-digit negative returns in public markets globally delivered what the UNJSPF described in its annual report as “the poorest performance of a 60/40 portfolio on record.”

Ortec’s study concluded that the rebuild could be protracted: “The negative investment returns from the recent past are yet to be fully amortized in the actuarial valuation. This makes it likely that the required contribution rate will increase in the coming years, all other things being equal.”

Switching up targets

Target exposure for fixed income duly rose from 29% to 39% – USD 9bn adjustment based on AUM at the time – while equities fell from 50% to 43%. Other asset classes were largely static: 8.5% for real estate, 7% for private equity, 1.5% for infrastructure, and 1% for cash. In embracing fixed income staples like corporate and high-yield bonds and thereby bringing down overall risk exposure, windows of opportunity opened elsewhere.

The UNJSPF’s private equity allocation remains relatively small, but there is now scope to do more with it from a risk-return perspective. “What this conservative and defensive asset allocation allowed us to do [is to say] ‘If we’re going to be in defensive mode, we will have time to start developing other asset classes that we have been thinking about for a long time, but really didn’t have the chance to do,’” Guazo explained. “One [of those areas] was private venture capital … [and] the team is very excited about it.”

Regarding private credit, Ortec suggested that the UNJSPF build conservatively from the ground up – limiting exposure to 2% – rather than dive headfirst into the asset class in response to macro conditions. It noted that listed spread products are currently more appealing, and should the risk-return for private credit change, it will be easier to raise the allocation if the fund has gained some experience in the space. Founded in 1949 by the UN’s General Assembly, the UNJSPF serves more than 220,000 current and former civil servants across 192 countries and territories – requiring payouts in 17 different currencies. It has offices in New York and Geneva, as well as a liaison office in Nairobi.

The fund is led by Guazo and Rosemarie McClean, who oversee investments and operations, respectively. Guazo previously spent nearly eight years as CFO of the UN, while McClean was formerly COO of Ontario Teachers’ Pension Plan (OTPP). As of end-2022, North America accounted for USD 56.8bn of AUM. Asia Pacific and Europe were at near parity – USD 8.4bn vs USD 8.1bn – while USD 830.9m in Latin America, USD 380m in the Middle East, and USD 223.4m in Africa. Approximately three-quarters of these assets are managed in-house. The private markets portfolio and a small portion of the equities allocation are outsourced. Within private markets, a 12-person team handles more than 60 GP relationships across private equity, real estate, and infrastructure, and Guazo expects that number to rise with the addition of venture capital and private credit managers.

The UNJSPF doesn’t name partner GPs, but it has reportedly participated in funds raised by Apollo Global Management and Global Infrastructure Partners. The private equity program, which launched in 2010, has exposure to 100 funds, including fund-of-funds. Co-investment began last year and about USD 9m has been put to work so far. Guazo said the primary motivation is to seek further diversification.

Keen to deploy 

Private equity firms have struggled to return capital – contributions to buyout funds globally have exceeded distributions in four of the past five years, according to Bain & Company – and this has left some LPs unwilling or unable to make new commitments. UNJSPF is not among them. “You have to generate a pipeline and keep producing. That is why we’re still doing deals, because you want to diversify in terms of vintages,” Guazo said. “We’re not in need of liquidity … so we’re just going to keep pushing it and building additional capabilities, including private credit and venture capital.”

This appetite for venture capital runs counter to broader LP sentiment. While Bain & Company tracked a 20% year-on-year contraction in private markets fundraising in 2023, venture capital was down 56% – and down on the five-year average by the same amount – as valuation resets and a lack of IPOs prompted investors to hold back.

The UNJSPF believes it complements a generally conservative portfolio. “Of course, it’s riskier, but it offers us more return – and it’s a good diversification,” said Guazo, adding his team has received a huge influx of calls from prospective managers after announcing its intention to enter the asset class. These have resulted in dozens of meetings with VC firms of all sizes, and the pension fund hopes to finalize its strategy within the next six months.

Cheque sizes for private equity funds tend to be in the USD 150m-USD 200m range. Guazo said that venture capital commitments will probably be around one-quarter of that, with an emphasis on building a portfolio comprising a wide variety of funds. The recommended 2% cap on private credit exposure will likely apply to VC as well, although deployment should be faster in private credit, with Guazo expecting to “have some deals done within the next six months.”

The UNJSPF is scouring for opportunities with managers that already feature in its private equity programme as well as establishing new relationships. These limits will not apply in perpetuity – allocations will move in response to the macroeconomic environment. It speaks to a flexibility that remains central to UNJSPF’s approach, thanks in no small part to its structure.

Unlike public pension funds, the UNJSPF operates as an independent entity, free from local government-driven investment agendas. “We’re nimbler [than a traditional pension fund],” said Guazo. “We don’t have to go to a board or an external investments committee to get investments approved.”