Nest, one of the UK’s largest workplace pension schemes, has announced a £1.5bn private equity spending spree in the biggest move by a British retirement scheme into the asset class.
The £20bn state-backed pension fund with 10m members on Friday launched a search for managers to build its private equity holding, with a target of 5 per cent of the portfolio invested in the asset class by the end of 2024.
Nest already holds private, unlisted assets, such as a £250m stake in private infrastructure equity, as well as private credit, but the scheme is now making its first foray into traditional private equity, where capital will be used to finance innovative and growing businesses.
“We want private equity to play an important role in our portfolio, offering strong returns and diversification,”
said Stephen O’Neill, Nest’s head of private markets.
“We’re excited about the positive impact we can have on growing companies.”
John Kay wrote an interesting article published in Prospect last year
RIP PLC: the rise of the ghost corporation
it asked some important questions of the shift since 1980 from publicly quoted equities towards financing companies through private markets.
What is all this about?
Is private equity another scheme for enriching financiers and executives, or a better mechanism for governing companies?
A means of avoiding tax, or of facilitating long-term investment?
An arrangement by which managers can function in the dark, or one which enables investors to have a better understanding of the activities in which they are placing funds?
He concluded..
It can be all of these things, and often is.
While much of what Kay says in this article and elsewhere is critical of the private markets, he recognizes that they are the way for small companies to become big companies and for big companies to stay honest.
The finance sector retains two key roles in modern corporate life. One is search—the need for fresh capital for business investment. But this is now mainly relevant not for big capital projects, but for new companies that simply need to fund operating losses until they achieve profitability. The other is stewardship—supervising incumbent management’s competence and integrity, and acting when necessary to effect changes.
It strikes me that pension funds are capable of not just becoming the source of funding and stewardship, but the controllers of the finances and management of the companies in which they invest.
Nest’s £1.5bn is but a drop in the ocean, even if it eventually allocates 20% of the £80bn it estimates it will be investing over the next 20 years, Nest will not move the dial on its own. But it has the capacity to work with other workplace pensions to provide the patient capital that is need by Britain’s growing businesses and the stewardship of larger companies.
And importantly, it can do so, without being conflicted by the need to extract profit for the financiers.
This of course assumes that Nest has the clout to forge new ways of delivering capital to the market and of delivering stewardship. Direct investment may take time and it will certainly need more than the £1.5bn announced last week, but what Nest and other workplace pension schemes have to offer, is money that can remain in the system over time. Add to these workplace pensions the DB consolidators and we may see pensions as a viable alternative for growing businesses to traditional sources for funding.
We may look at this announcement as the detonation of a small but significant change in the way financial markets operate in the UK.