32 Pension Protection Fund Responsible Investment Report 2021/22 ESCALATION AND EXERCISING SHAREHOLDER RIGHTS CONTINUED Exercising our rights in other assets CASE STUDY Our rights as a provider of 昀椀xed income debt to a company di昀昀er markedly from those as a shareholder. We 昀椀nd that Negotiating best governance as achieving large-scale change among 昀椀xed income issuers a private credit investor can often be more e昀昀ectively managed through industry- led initiatives rather than as a single investor. PPF funded the development of 155 new social However, we have developed a fully integrated approach to housing units in a London borough. The investment the assessment and oversight of our potential and ongoing will be serviced by securitised lease payments 昀椀xed income investments. As an example, in UK private ringfenced within a legal structure. credit, where data can be less readily available, we rely We set out to simplify what was a complex structure heavily on our internal due diligence process. This involves by delineating responsibilities to ensure all foreseeable signi昀椀cant engagement with management of private risks were addressed in a timely way. In particular, we companies. ESG considerations, in addition to commercial were keen to ensure that the local authority backing and risk-related analysis, are evaluated and concerns are this deal was set up contractually as the ultimate addressed within the process. safety net. Ultimately, if we are not comfortable with the terms of a To achieve rating parity between the structure and deal, we will not participate. However, we will often seek the sponsoring local authority, we ensured that to propose amendments to the terms of the agreement construction risk was removed from our transaction and ensure that any additional requests we have are and debt service payments bene昀椀ted from statutory incorporated into the deal and – where appropriate – the protections available to traditional borrowing in future structure of the company. As part of the ongoing that sector. management of 昀椀xed income assets, we will often continue to seek positive change once entering into an agreement Construction risk was addressed by establishing (see case study, right). a risk control framework. This included 昀椀xed cost In private market closed-ended funds managed externally, contracting, contractual guarantees to the constructor we have found that it is almost impossible to retrospectively from its ultimate parent, insurance protection and, if all change any contracts or side letter terms that were signed else fails, the council standing as ultimate guarantor. historically. Therefore, we look to obtain su昀케cient recourse Key to our investment thesis was the self-supportive in our side letters, so that if we determine that we no longer nature of the asset. This was deemed important to wish to remain invested in a portfolio company due to mitigate reputational risk and ensure the collateral an unmitigable risk, we have the option to transfer out of can provide meaningful protection enhancement. the fund.