The secondary market for private equity investments is booming.
The FT is reporting on the US market and the impact on US pension funds (note the dollar bills in the illustration.
But there is evidence that UK pension funds are set to benefit from private equity deals resulting from “once in a lifetime” buying opportunities.
Where do these opportunities come from?
According to Disruptive Capital’s CIO Kathryn Graham, private market investments held by pension funds looking to swap their assets and liabilities for annuities provided by insurers are being told by their prospective counter parties that their private market holdings – especially private equity holdings, are not wanted and that the insurers want these assets sold for cash or exchanged for corporate bonds and gilts (which they can use to make annuity promises going forward).
Graham says that this is flooding the UK secondaries market with private market assets which are available to smart investors at a substantial discount. The urgency of pension schemes rush to buy-out means that many assets form part of a fire sale.
Many pension funds hold a lot of these assets which couldn’t be sold during the LDI crisis to meet collateral calls and now form a high proportion of the growth portfolios remaining in otherwise “de-risked”schemes.
The FT reports
Specialist buyers of fund stakes including Ardian, Hamilton Lane, StepStone Group and Lexington Partners have recently raised record-sized funds to purchase second-hand fund stakes. In 2023, secondary funds raised a record $93bn, according to Preqin, a 160 per cent increase on the year before.
A buying opportunity
David Hitchcock, head of sales at Disruptive Capital points out that there is now a buying opportunity for DC, DB and wealth funds.
“The problem is getting to these secondary funds”
Says Hitchcock.
XPS recently announced it was looking to set up a secondary market specifically to help the sale of old assets and their transfer to schemes that can use them. At a recent presentation to the Pension PlayPen coffee morning . Andre Kerr explained his consultancy’s ambition to set up an alternative to specialist firms like Ardian. Whether this is realistic remains to be seen but it is encouraging to hear that this kind of innovation is in process.
A recycling opportunity
At a time when the UK pension market is reorganising itself around the new-found opportunity for many DB schemes to hasten to their end-game, the DC occupational schemes are being urged to diversify from listed equity and bond portfolios into private markets.
Recycling private assets through secondary markets seems an obvious and worthwhile things to do. Whether through LTAFs or LTAF equivalents , I hope we will see new funds springing up to help manage this transition.
“Once in a lifetime” reminds me of “It’s different this time”, a saying which tends to precede market “corrections”.
I prefer this one:
https://youtu.be/0rrAP4lJ3_8
This is such a Waste of DB assets which should stay invested for the long term returns. The rush to buyout is removing so much money from the kinds of investments that our economy desperately needs and DC is not yet set up to accommodate illiquid investments due to the pricing and transfer rules which lead funds to seek liquid readily tradeable assets rather than those that need to be kept for years. Closed ended funds could be traded in extremis without disrupting the underlying portfolio but open ended structures would require forced selling to redeem large withdrawals when employers transfer providers. That risks gating and lock ups. So I hope the remaining DB schemes will be used to better support the economy rather than shunning higher return higher risk assets but so far that’s not happening.
While I wholeheartedly agree with Ros, the problem with pension schemes buying long-term or illiquid assets on a secondary market is that the business opportunities that they represent have already been established and funded. This does not exactly fulfil the Government’s ambition to stimulate economic growth through the unlocking of pension scheme’s capital.
Rather than seeking to direct the investment policies of existing pension funds, the Government’s objectives would be best served by adopting policies which encourage the growth of the investment pool invested to seek long-term returns. This would most easily be achieved by by encouraging new or further pension provisions to be in whole-life defined or targeted pension benefit arrangements (DB and CDC), rather than focusing on the demise of such schemes as appears to be the policy direction of the past 20+ years.