A multi-billion pound investment catalyst

by | Oct 5, 2022

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Planting for the future

Over the next five years M&G aims to invest up to £5 billion in privately-owned enterprises that are tackling environmental and social challenges across the globe. The initiative is called Catalyst and IFA Magazine Editor, Sue Whitbread, recently spoke to Adrian Gaspar who is Investment Director at M&G’s Treasury and Investment office and also to Alex Seddon, Head of Catalyst at M&G about how M&G is galvanising the growth of innovative companies working to create a more sustainable world.

SUE: Let’s start with the big question, what exactly is catalyst and how did it come about?

ADRIAN: From my perspective, Catalyst is a very clear commitment from M&G to invest in businesses looking to find, or indeed those that have found, solutions to the many environmental and social challenges that we face in today’s world. Our targeted investment of around £5 billion over a five year time period is a significant commitment which we’ve been able to create in no small part because of the size and scale and the long term capital flows of the Prudential With Profit Fund as well as being able to leverage our existing expertise in private markets and sustainable investing.

ALEX: The idea behind Catalyst came about in 2020 as the Covid pandemic was really taking hold. It was born out of the idea that certain big themes would drive markets over the next decade and beyond such as climate, health and inequality. It became obvious to us that there wasn’t the right kind of capital, or certainly not sufficient capital, to address these issues. So we set about doing something about it. We designed the mandate during that year, and we launched Catalyst in January 2021 with this significant commitment from the With Profits Fund.

SUE: Sustainability is clearly at the heart of catalyst, but would you say that each individual transaction also has to be a compelling investment opportunity in its own right? and if so, how do you monitor that?

ADRIAN: Through Catalyst, we’re looking to help provide momentum and long-term capital to what are often smaller, very innovative businesses. We must always remember, of course, that it is our job to work to continue to generate those risk adjusted returns that have helped support the delivery of good outcomes for PruFund with Profit policyholders. We’re totally focused on doing that but also want to do the right thing from an environmental and social perspective too. Clearly, we hope that those businesses in which we invest through Catalyst will prove to be successful over time.

ALEX: Looking to the future, if we’re right in terms of the investment thesis here, the businesses that we’re partnering with, that we provide capital to, that we help to succeed, help to scale, are going to become the successful and big businesses of the future. We think that investing in the best possible management teams who are applying innovation and technology to address these really big themes, whether that’s climate or health or social inequality, is just a smart way to invest over the next few decades. We know that once conviction starts to build around that idea, then it really is one of the most compelling areas to be deploying capital. We fully expect to drive very attractive risk adjusted returns via these investments and drive significant impact to scale. We don’t think it’s an ‘either or’ situation, we think it’s both.

ADRIAN: I should add that although they’re private enterprises, some of the businesses we invest in are also reasonably well established and they’re just looking for that support to go on to the next level.

 ALEX: In such cases, it’s about us helping to scale these businesses up so they can fully develop a proven technology or strong underlying product along with their ambitions to try to tackle some of these issues and challenges which are global in nature. But they need long term supportive, flexible capital partners to help pull that off and that’s where we can help.

SUE: What do you see as the main benefits of investing globally in private markets for advisers and their clients?

ADRIAN: From a broader perspective, we see huge opportunities and many interesting ideas and businesses out there. We should also remember that long term institutional capital at scale is very attractive to these investee companies. That brings other benefits as it means that we can negotiate attractive terms on behalf of the funds and ultimately our policyholders. It gives us a a strong voice with a lot of our investee companies, which is likely to be heard by company management about direction of travel and strategy in some of these cases and sits well for the long-term impacts.

ALEX: As these themes are global in nature, we believe that the scale of this opportunity is vast. To put some numbers on that, I believe that it is estimated that about $6.9 trillion of investment is required per annum to 2030 to hit the UN’s sustainable development goals (SDGs).

There are therefore multi-trillion dollar investment opportunities within these global themes such as carbon transition. This is likely to lead to a wholesale transformation of many, if not all major industries and the creation of new ones. So, we believe there is an advantage to being a scale provider of capital in such areas. As Adrian mentioned, it allows us to access investment opportunities that others will simply not see. That’s the nature of private markets, and particularly when the opportunity is this big. There is a real advantage to having a flexible global scale fund that can get involved in the most attractive investment opportunities available so that ultimately our investors can benefit.

We’ve got a strong team dedicated to Catalyst. Currently there are 35 people in the team and growing because it’s fairly resource intensive to do this. The deals don’t come pre-packaged – we have to find them, negotiate them and structure them. We’re also having to underwrite all of the ESG risks and also the impact risks and opportunities as well as financial risks and opportunities. There’s a lot involved and there are no shortcuts. We’re very pleased that we can do efficiently and effectively by building on our strengths.

SUE: Looking ahead, what does success look like with catalyst over the months, years and decades to come?

ADRIAN: We want to see the £5 billion invested in dozens and dozens of innovative companies that grow and become successful as well as making meaningful contributions to meeting the many challenges that we currently face, particularly around areas like climate change, for example. We shouldn’t ever forget that this success will be beneficial to those who I’ve always believed are the most important people and that’s our underlying policyholders/investors.

ALEX: The way I think about future success for Catalyst is to judge its impact in terms of decades. Clearly, we need to drive strong returns for our with profits customers over the long run but with Catalyst also, we need to build a legacy of significant impact across these themes that we’re focused on. We’ll do that by identifying the successful companies of the future and helping them scale. As they scale and they succeed, then they will deliver more and more impact. But you can’t do that without having a solid foundation of good investment returns and also, of course, being able to manage a successful, high performing global team that finds those opportunities and makes them happen. There are lots of different aspects to how we achieve this, but the ultimate measure will be returns to our customers as well as the impact to society over the very long run

SUE: What do you see as the key risks that advisers should be aware of when it comes to investing in private markets? and also, how can you help mitigate risk through catalyst?

ADRIAN: We must remember that private markets offer great opportunities, but there are risks involved such as investment risk, liquidity risk, credit risk, for example. That’s where our resource and expertise comes in to try and minimise these risks through effective due diligence.

ALEX: Diversification is hugely important to us, as is liquidity. What’s important here is to consider Catalyst in the context of the broader asset allocation of the entire With Profits Fund. When we do that, these kinds of earlier stage and scale up risks can be taken in that context without exposing customers too much to the sort of idiosyncratic risks that might otherwise apply to some of these positions that we’re going into. And we’re not exposing the customer to illiquidity problems either which is crucial.

As a way of summing this all up, I think there are three important points here as follows:

  • The need for proper resourcing to do the underwriting and the resourcing properly.
  • Not to expose customers to unnecessary illiquidity
  • To ensure that the overall portfolio has significant diversification

ADRIAN: All three of these are front and centre for us at M&G. We’re looking forward to continuing to capitalising on what we see is a wonderful opportunity to discover new and innovative ways of achieving strong long term investment performance for our investors in the years and decades to come. We hope that our relationships with advisers and their clients will go from strength to strength too.


Click here for more information about M&G’s Catalyst

About Adrian Gaspar

Adrian joined M&G in 2015 and has worked in a variety of roles since joining the industry in 1987. He is passionate about working with advisers to continually build their knowledge and understanding of Pru multi asset solutions, including PruFunds.

 

About Alex Seddon

Alex Seddon is Head of Catalyst at M&G, the London based savings and investment business. He was previously Co-Head of Private Credit and Head of Alternative Credit at M&G and before that Head of Principal Finance at PruCap. He has been investing in the public and private markets since 2003, at M&G and PruCap, and has expertise in private asset origination, portfolio management and investment leadership.

Catalyst is a global investment mandate with an innovation and broad impact focus, aiming to minimise negative and increase positive impacts for people, communities and the planet. Catalyst will make direct investments in private assets across the capital structure, including senior debt, mezzanine and equity

 

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