Private Equity Article

[yieldhog]

I noticed a headline about a recent Telegraph article suggesting a potential catastrophe for UK pension funds relating to their investments in private equity. I'm not a subscriber to the Telegraph and so I can't get online access to this particular article.

Has anyone seen this article and can give us a summary of it?

Y

[Itsallaguess]

I noticed a headline about a recent Telegraph article suggesting a potential catastrophe for UK pension funds relating to their investments in private equity. I'm not a subscriber to the Telegraph and so I can't get online access to this particular article.

Has anyone seen this article and can give us a summary of it?

Here it is -

The £5 trillion ‘pyramid scheme’ threatening to wreck your retirement

The ‘Wild West’ of private equity valuations risks triggering a pension funds catastrophe -

https://archive.is/TVkrr

Cheers,

Itsallaguess

[UncleEbenezer]

It's about leverage in the sector. I don't believe UK VCTs are particularly exposed to that, except insofar as all assets get squeezed.

If leverage shatters, the most exposed sector of all is also politically sensitive. Look at how much got sacrificed last time to prevent a substantial house price correction. It's all a matter of how governments of the day react.

[Kidman]

I would like to see the amount of UK pension scheme assets in private equity. I suspect it is almost none.

Years ago pension schemes invested mainly in property and equity but due to the Pensions Regulator's rules and guidelines, schemes have been forced into more bonds and over recent years LDIs. LDIs are IMO far riskier than private equity as they were double leveraged. Apparently that is being reduced but everything takes time. LDIs came to the fore in the Truss/Kwarteng days when the gilts market went crazy and LDIs lost enormous anounts of value. Whilst increasing interest rates lower scheme assets when in bonds, they supposedly reduce liabilities as well.

Private equity certainly doesn't fare so well now we are nomalising interest rates but it should still make money just like VCTs should. It is all down to the price paid for a business and the money received on exit!

[scotia]

I would like to see the amount of UK pension scheme assets in private equity. I suspect it is almost none.

Years ago pension schemes invested mainly in property and equity but due to the Pensions Regulator's rules and guidelines, schemes have been forced into more bonds and over recent years LDIs. LDIs are IMO far riskier than private equity as they were double leveraged. Apparently that is being reduced but everything takes time. LDIs came to the fore in the Truss/Kwarteng days when the gilts market went crazy and LDIs lost enormous anounts of value. Whilst increasing interest rates lower scheme assets when in bonds, they supposedly reduce liabilities as well.

Private equity certainly doesn't fare so well now we are nomalising interest rates but it should still make money just like VCTs should. It is all down to the price paid for a business and the money received on exit!

For those of us who had to lookup what LDI stood for, it is a Liability Driven Investment.
And if you are a glutton for punishment , there is a 45 page document describing how these are used in Pension schemes at https://www.bmogam.com/uploads/2021/06/bf77d0fc81b9310168bcb5280e7ebf1e/ldi-explained.pdf
which appears to have been correct at August 2017

[Boots]

I would like to see the amount of UK pension scheme assets in private equity. I suspect it is almost none.

The PPF Purple Book is published annually to detail the workings of the various schemes which might be eligible for entry into the PPF, should insolvency occur. The latest one, 2022, is available here --> https://www.ppf.co.uk/-/media/PPF-Websi ... k_2022.pdf

There were 5,131 schemes at 31 Mar 2022 which are included in the book. On page 25 (27 in the PDF) it details that a simple average across all the schemes of the Unquoted/Private Equity asset allocation was 6.6%. However, since the smaller schemes are numerous, but hold little or none of that asset class, a weighted average is more meaningful. This weighted average asset allocation across all the schemes for Unquoted/Private Equity was 21.5%.

As for the asset allocation of the PPF themselves, sadly they do not seem to publish data in the same level of detail. Their chart is here --> https://www.ppf.co.uk/investment/asset-allocation-chart. However, even despite their large asset base (£33bn), they are dwarfed by the £1.67tn of the schemes outside the PPF.

[Kidman]

Boots, that's very interesting, thank you.
I wonder whether schemes hold direct private equity (PE) shares or participate in PE fund vintages. Do they count shares in private equity investment trusts (PEIT) as ordinary equity or private equity?

I always look in the notes to the accounts of all the annual reports that I receive and I have never seen any PE detailed in any of the assets breakdowns.

I hold direct PE, PE funds and PEIT shares. I am happy that they will continue to perform well albeit not as well as in those years of abnormal interest rates!

[SKYSHIP]

What a total twaddle of an article in the DT.

WOW! BT Pension Fund has increased investment in PE up to £1.1bn. The fund is worth £38bn - so PE is under-represented at just 2.9%!

Read through the article and what he is really talking about is Private Credit and leveraged lending. Nothing about PE at all - yet he writes this headline to grab attention:

The ‘Wild West’ of private equity valuations risks triggering a pension funds catastrophe.

PE valuations are issued monthly and prove conservative time and time again as trade sales are nearly always made at a substantial premium.

I recommend taking time out to view some of the many PE presentations - starting with PIN & APEO.