Will our pensions reform private equity or become its victim?

Peter Harrison, Schroder’s CEO is making some important comments about investing in the stock market. 

“Ultimately, we’ve got to grow the wealth of our customers. The move towards private assets is a reflection of the fact that that’s where the puck is going.”

In workplace pensions, our thinking is driven by the cost of management fees rather than the composition of the index we are investing our money in. Unfortunately, the indices that we know,  from FTSE, S&P , DOW and Nikkei are those that track publicly quoted assets. Investors such as Terry Smith have long held that many of the best investment opportunities are not even quoted on the stock exchange and do not get close to the indices we invest in.

Right now, the big investment story is who will be owning Morrisons, a house hold name that you would expect to be in the index your workplace pension tracks. It looks like it will end up being owned by Fortress, an arm of Soft Bank. It is easy enough, armed with borrowing power to leverage a buy-out of shareholders with debt and the economics of doing so are compelling. This from the FT..

In the first half of this year private equity firms announced bids for UK-listed companies at the fastest pace in more than two decades, taking advantage of depressed valuations as a result of Brexit and the pandemic.

By its nature, private equity is harder to access than public equity. But if the burden on those running large companies on a quoted basis is eased by the lighter reporting requirements of a privately owned company, it is unsurprising that senior managers jump at the chance of going private. If the incentives of going provided are based on reduced reporting and less onerous rules on governance factors such as executive remuneration, then the Government are right to look at the rules.

The natural reaction of a conservative government will be to a lightening of the regulatory load on public companies to create a level playing field, but this looks retrogressive. How about an improvement in the reporting on private equity and a raising of the bar for the inclusion of private equity and debt in the new Long Term Asset Funds , in planning for launch later this year?

The “G” in ESG is important. If we want our companies run by boards who value the social impact of their and their company’s behavior, we need to take an interest in how the market is restructuring, the impact it is having on corporate behavior and the options we have to improve our investing.

Chris Sier has written to me saying that private equity never has a place in DC investment and , from a governance and transparency perspective, I can see why he says this. But if so much of the UK’s corporate activity is now in the hands of private investors, then reducing the investable world for DC savers to the 100- 250 remaining publicly quoted companies in a FTSE index looks a cop-out.

I’d like to know more about what Peter Harrington is getting at when he claims

“The incentive structures in the [fund management] industry don’t support long-term thinking”

My and the millions of other investors in workplace pensions are investing long-term and if we see our money continuing to be invested to and through retirement, the notion of “long-term” is elasticated.

But simply dumbing down governance standards for publicly quoted companies (for instance by creating dual share classes to please entrepreneurs) does not encourage me. What I’d like to see is private companies encouraged to access money like mine through funds that are managed for the long-term. Which is why the governance structures surrounding LTAF, matter to me as a potential investor.

I think I agree with Chris Sier in not wanting my money invested in a private equity according to the current rules, but that need not be the case for ever. If my (e.g. my taxpayer) money is encouraging public companies to go  private (due to the favorable tax-treatment of debt), I am also owed access to the resulting pie – as a private investor

So the next few months look like being interesting for people who have money with Nest, People’s Pension or other master trusts. Indeed it looks interesting for those who have monies invested with insurers in workplace GPPs, insured master trusts and non-workplace pensions.

When managers like Schroders talk of wanting major reform of the structure of investable markets, it is time for investors to take interest. This is part of Making My Money Matter and an important part too.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Will our pensions reform private equity or become its victim?

  1. ConKeating says:

    Private equity is less highly regulated than publicly listed shares. The information disclosure arrangements are far less complete and with that, less onerous. This means that private equity is intrinsically riskier to us as investors than publicly quoted shares. This is in essence recognised by the private equity management industry when they claim that higher fees are needed to manage private equity portfolios.
    We have a particular problem in the UK. Since 2000 the UK market’s share of the capitalisation of all stock markets has fallen from over 8% to a little under 4%. From the 1980s heyday of over 7,700 listed companies, there are now fewer than 2,000, and many of those are overseas entities, with little relationship with the UK economy. Not that listed markets have ever been truly representative of the economy – just think of the 1970s, when so much was nationally owned.
    It should be obvious that pension funds have played a major role in this decline. Their asset allocations have moved from over 70% equity to around 20% in recent years, and of that the UK share is down to a little over 10%. This is a shift in allocation of the order of £1 trillion. Of course, much of this shift has been the direct result of pension regulation.
    Without this shift, what might have been?

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