Purpose

The Lancashire Pension Fund, supported by the Fund's pooling partner "LPPI", have considered investment of £35m into the Eden North project in Morecambe by way of a 25 year loan.

The project is forecasting annual investment returns of c. 7%-9%. These are in line with the target returns for the portfolio.

However, as part of the due diligence on this project, LPPI have identified that the post development financial risks are higher than would ordinarily be accepted for such a project.

Normally LPPI would expect the ratio between net revenue (after costs) and debt service (interest and repayments) to be in the region of 1.5x. Should the project fail, LPPI would take charge of the asset (on behalf of the Pension Fund) as collateral so the asset can be sold and used to repay the debt.

In order to support the project, LPPI have advised that they could accept a lower ratio (as low as 1.2x). However, LPPI has received independent valuations if the project were to fail, cease to service the debt and LPPI take possession of the property. These value the asset at £37m – leaving a risk to the Fund's investment of £35m. This valuation also assumes the site continues to operate as a leisure destination which may prove problematic given the reason for the default would likely be poor trading conditions.

Whilst this project attracts a greater degree of risk than would ordinarily be accepted, there are other non-investment benefits for the Fund including economic and social benefits for the local area including increased jobs and regeneration as well as local reputational risks of not investing in the project.

It is noted that, whilst this project would be a sizeable element of the Fund's local investment intentions, it does represent only c 0.3% of the total Fund's assets.

So, whilst the risk for the project is large, the risk to the overall Fund is low given the small proportion of the portfolio that this account for. On the balance of risk, it is considered that the social and economic benefits of the project to the local area justify the additional financial risk to the project.

Consequently, and having consulted with the Director of Finance and the Chair of the Pension Fund Committee, it is agreed to progress with the £35m investment into Eden North.

Decision

Peter George, Head of Pension Fund, took the decision to approve the pension fund investment into Eden North.