After a week of hearing how hard it will be to invest in growth capital. I am relieved to hear that the British Business Bank is planning to help pension funds invest in venture capital using its considerable intellectual resource and financial clout.
Jo Cumbo had a broad smile on her face on the final day of the PLSA conference in Manchester. I took this to mean she had a scoop and she has. The news lands as we all got home but it’s none the worse for that. The PLSA must wish that Andrew Griffiths, the Treasury’s spokesperson, could have made this pension’s Autumn Statement when he spoke on Wednesday.
The UK government is set to soon unveil plans for a new investment vehicle overseen by the state that is intended to turbocharge pensions funds’ investments in high-growth private companies.
According to the FT, the key features of the plan are
- An investment vehicle where pension funds can co-invest in high-growth companies under the guidance of the bank
- The BBB has also offered to give pension funds access to some of its older investments so they can have cash flows from their portfolio from the first year without selling assets at a discount
- The BBB will also offer pension funds access to its in-house expertise.
“Cracking on with it”
While it looks like the pension initiatives like the VFM assessment will take years to implement, Jeremy Hunt seems keen to get this initiative underway without more ado.
There remain questions about the detail. Will the BBB use open ended funds (such as LTAFs) which are proving clunky and prone to gating or will he used closed end funds such as investment trusts which are more easy to trade but see assets trading at a discount.
It seems inevitable to me that should you wish to encash an illiquid at short notice, you run the risk of finding no buyer at the price you want. That is why illiquids are often referred to as “long-term assets”.
The pensions industry currently thinks of “long-term” as “risk” since it has become petrified by cash demands from everything from LDI collateral calls to transfer requests. I spoke to one master trust during the week who reckoned one of their biggest risks was losing a large sponsoring employer. There is little in – specie transferral of assets in the DC market, even where billions of pounds changes hand. Were a Bupa or Vodaphone to leave their mastertrust, then such sums would be involved.
I see one of the major advantages of the BBB’s initiative, is that it could be made available to all DC funds, including the defaults of GPPs , master trusts and the fast diminishing numbers of single employer DC occupational schemes. If a single structure is used by all, then inter- trust transfers could become common and the fund start being embedded in all workplace pensions.
I also see big advantages in such an arrangement in terms of the cost of this arrangement. If performance is to be valued on a forward as well as a backward looking basis (as the VFM assessment looks like doing) then the added cost of investing in the BBB arrangement could be offset by a credit in terms of forward looking projections. If – and this will be a stretch for many advisers and buyers, cost is reckoned by what is being purchased, the exposure to the BBB arrangement might be considered an offset against a higher price.
This is a periphrastic explanation of what Callum Stewart calls 10+10+10, where 10% allocation to illiquids puts 10 basis points on performance at a 10 basis point increase in costs of fund management. Ultimately the extra cost is a price worth paying in terms of better outcomes.
However, for such a formulation to be accepted, we must first accept that the headline cost of defaults will go up and that the short term impact on performance may go down. Even if pension funds don’t have to suffer from “dry powder” (capital awaiting deployment), because they can buy into BBB’s existing portfolio, the costs of accessing such arrangements need time to be recouped. So many workplace pension providers will continue to be wary of jeopardising short term competitive pricing for the promise of better outcomes.
This is where the value in the VFM formulation must win through. Long term need not mean “risky” so long as short-term liquidity is properly managed elsewhere in the default fund. There has to come a time when exposure to long term assets is considered a pre-requisite of a default fund.
If we can clear the hurdles of headline price and short-term liquidity, then there is a third hurdle yet to be straddled. It would be easy for the BBB to become the sole source of venture capital for pension funds. There are competition issues here which need to be addressed. While the BBB arrangement as Nest and the PPF have, can set a new standard through Government intervention, that intervention must lead to further competition. Nest competes with other DC master trusts, the PPF may spawn superfunds that aspire to its operational efficiency. BBB must become a spur to the market, not the market itself.
These observations are made within hours of reading of the proposals in the FT. Of course I am reading a placed leak from the Treasury and the Autumn Statement may contain nothing on this. But that would be unlike the FT and the Treasury.
My thoughts, being spontaneous , may also be unshaped. But I find that it is often the immediate reaction to news, rather than more nuanced considerations, that better suit a blog. The definitive reaction to these proposals will be from workplace DC pensions, for whom I imagine they are principally designed. Considering the enthusiasm to talk about, but the reluctance to do much about illiquids by the major players at the PLSA, I can only think this initiative will be welcomed.
The litmus test of this initiative is take-up, I hope by the PLSA annual 2024, we will already see allocations to the proposed arrangement.
Time and pensions waits for no man – least of all a Chancellor with an election coming.