Cashflow-driven investing (CDI) is about meeting the outcome that matters most to pension schemes – being able to pay out liabilities as they fall due.
The approach involves investing in assets that generate predictable cashflows that can be used to match liabilities whilst still having the potential to generate attractive returns. This approach leads to more certainty of outcome in comparison to a traditional approach that concentrates on returns from growth and matching assets (a ‘bar-bell’ approach).
In practice, it means building a portfolio of highquality investment-grade debt and debt-like assets that, after allowing for expected defaults, is designed to match liabilities and generate returns. Liability-driven investing (LDI) is also used as part of the strategy to fill in any remaining gaps between the asset and liability profiles.
The approach has been favoured by insurers for years; Now pension schemes are also considering and implementing it.
Including private assets in CDI can provide a yield uplift through illiquidity premia, as well as other benefits such as diversification and downside protection when compared to public markets. Until recently, these assets were the domain of larger pension schemes with significant governance budgets. Now they can be accessed by schemes of all shapes and sizes; there are single and multi-strategy pooled funds available, as well as bespoke solutions.
This paper describes the private debt assets that might be suitable for CDI, and considers how pension schemes can make the most of today’s opportunities in this competitive market.
