The new target of private equity: your pension fund

Buyout bosses are eyeing a vast pool of potential capital in the pensions industry.

They hope to have access for the first time to pots of money in so-called defined contribution schemes, where millions of employees in the UK invest their savings for retirement.

This month, the UK’s largest workplace pension scheme, The National Employment Savings Trust, became one of the first defined contribution schemes in the UK to invest directly in private equity, appointing UK-based asset manager Schroders to deploy at least £1.5 billion in the asset class. by 2025.

Now the industry is hoping billions more pounds of DC money could follow suit.

“It’s a very encouraging sign and I think it’s safe to assume that other DC investors, whether master trusts like Nest or single employer plans, will follow suit,” says Joanna Asfour, Global Head of Consultant Relations at global private markets firm Partners Group. .

“A lot of sponsees are watching this space very closely.”

decisive moment

Nest, which represents a third of the UK workforce and has £24bn in assets, said its longer-term aim was to invest around 5% of its portfolio in private equity. Mark Fawcett, Nest’s chief investment officer, said the move could be a “watershed moment” for the private equity industry by helping to make it accessible to average savers.

Schroders’ team says it is talking with other DC programs about similar moves in private markets, which range from private equity to private credit, real estate and infrastructure.

Hopes that Nest’s peers will also be tempted into the buyout world are growing as the government seeks to relax rules that have so far prevented DC programs from getting their savers’ money into the private equity market .

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One of the biggest hurdles has been the fees. The DC schemes’ exposure to private equity was limited by the 0.75% fee cap on funds under management with a DC default agreement.

The cap limits DC plans’ ability to invest in illiquid assets, in part because performance fees, payable to private equity managers if they generate high returns, are currently included in the cap. However, the Department for Work and Pensions is currently considering how to exclude performance fees from the cap on charges, in a bid to encourage DC money in private markets.

“It would radically change the market because that’s the biggest hurdle. There are a lot of other hurdles around price and valuations, but fees are the biggest hurdle for DCs,” said Geoffrey Geiger, head of private equity funds and co-investments at USS Investment Management. Financial news sister title Private equity news.

The USS IM is the in-house investment arm of the UK Universities Pension Scheme, which had £82.2 billion in assets under management according to its July 2021 annual report.

Nest managed to get into PE despite the fee hurdle, as its arrangement involves no performance fee and Schroders said it would take a fixed percentage of the assets it managed.

Liquidity is another obstacle.

While traditional defined benefit pension plans have enjoyed access to illiquid private market assets for decades, their adoption by their defined contribution counterparts has been limited to date.

The existing DC landscape in the UK, which includes the requirement for daily liquidity on the platforms, has prevented UK DC institutional investors from investing in illiquid markets such as private equity.

But Asfour says consultants are now “increasing dialogue with administrators” in private markets, following DWP proposals that would require DC schemes to “disclose and explain” their policies on illiquid investments.

Government incentives

In order to overcome liquidity problems, the government is encouraging the launch of long-term asset funds.

Offered by the Financial Conduct Authority, LTAFs are a conduit that aims to provide DC investors with easier access to these long-term investments. These are authorized open-ended funds that can invest in private market assets and companies.

If LTAFs and fee reforms can be successfully introduced, the potential influx of DC money into private equity could be significant. DC schemes are expected to have combined assets under management of over £1bn by 2030, according to the FCA.

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But in the meantime, eyes will be on Nest to see how the DC regime’s push into PE rates.

“When we said we were going to do private equity, everyone told us it was impossible,” Fawcett recalled at Schroders headquarters in the City of London this month when presenting his plan. to break into the asset class.

Nest’s Fawcett said the state-backed program will target growth, co-investment and direct mid-market deals. “It’s not about big LBOs [leveraged buyouts]. We will not invest in Twitter or Asda,” he said.

Nest may not be targeting the kinds of mega takeovers that grab the headlines, but its tie-up with Schroders nonetheless marks a historic moment for the UK private equity industry.

This article was published by Financial News’ sister title Private Equity News

To contact the author of this story with comments or news, email Sebastian McCarthy

Dolores W. Simon