Faceless markets
There is a general feeling that UK pension funds should be investing where they want. I agree that they should, but “how they want” is another matter.
Right now there is a trend towards investing in American software, notoriously the “magnificent seven” but also in the private sector a large amount of software holdings.
While software companies have been identified, it could equally apply to other private equity companies where valuations originally made in a low interest rate environment cannot now be supported. The interest rate effect on valuations was more pronounced in the UK than in the US.
It could be argued that the UK Government policy effectively encouraging pension schemes to purchase overvalued assets. But it could be argued that the way the dollar has moved against the pound has worked against American stocks. These are arguments about what markets to be in.
I wasn’t aware of anyone talking about this in Edinburgh. Instead we had silly and facetious political squabbles about mandation. I want to understand markets but I want to feel protected by regulation from markets that go wrong.
Markets going wrong beyond our control.
Those old enough in the Edinburgh room will remember that UK pension funds invested in the UK as a matter of course in the last century.
One of the reasons for that was that we had trust in our market- making and through the UK stock exchanges. How far we have moved from UK regulation of the assets of UK pensions can be assessed through this article in “Investing.com“
Apollo Global Management executive John Zito told UBS clients last month that private equity firms are broadly misstating the value of their software holdings, warning that lenders could face substantial losses in the sector.
Zito, who serves as co-president of Apollo’s asset management division and head of credit, said he believes private equity marks are incorrect as shares of comparable public tech companies have declined. His comments were first published by the Wall Street Journal.
The remarks come as investors have sold shares of public software companies on concerns that new tools from Anthropic and OpenAI could make existing software firms obsolete. This has raised questions about whether private credit lenders are holding outdated valuations of their software loans, triggering redemptions as investors seek to withdraw funds from private credit vehicles.
Zito’s comments at the UBS event focused on private equity valuations, but he noted that many companies acquired by the industry also obtained private credit loans. If the loans face difficulties, the equity positions are also affected, he said.
Zito identified software companies taken private between 2018 and 2022 as particularly exposed. He described many of these firms as lower quality than larger public competitors, referring to a period marked by high valuations and low interest rates.
The Apollo executive warned that private credit lenders and their backing investors could experience significant losses. He said lenders to a generic small-to-medium sized software firm could recover somewhere between 20 and 40 cents on the dollar if the companies are in the wrong place in terms of the new AI-led regime.
Apollo sought to distance itself from potential software sector losses, telling analysts that software companies represent less than 2% of the firm’s assets under management. The company said it has zero exposure to private equity stakes in software firms.
It should be noted that an increasing amount of the pension funds that we relied on are pension funds no more. Instead they are invested by American private equity funds, we know not where. We trust the American regulators and the PRA are showing increasing concern that no one understands the market.
I have come in for a lot of stick the past few days for saying that mandation is a means for our Government to intervene in UK pension investment. The entire world apart from me, Torsten Bell and Rachel Reeves are against mandation.
It is not the ABI , Pensions UK or the Government’s various “oppositions” , to take charge of how and where our pension funds are invested. In the end it is the tax-payer who elects our Government and our Government, working through the Treasury and the BOE, the PFA and then the FCA who control flows of capital.
We cannot pretend that the fiduciary responsibility of Trustees overrides the responsibility of Government to keep Britain in good shape. Patriotism should remain upper most in our investing and that is measured by our deep trust in our Government’s regulators to do the right thing.
Scratch a Liberal and a fascist bleeds. The very last people I would want to direct the capital of pension funds would be the Treasury (especially the mendacious Rachel Reeves), Andrew Bailey and the myriad self-serving second-raters at the FCA. I’ll stick to tried and tested tools that built modern prosperity: robust property rights and the free market.
There was an investment case for UK pension schemes to buy and hold index-linked gilts from
their first issue in 1981 until
the mid-1990s.
Thereafter, the investment case for such gilts was weaker and their average annual returns over the last 20 years have been only 3.2% (and negative over the last 3, 5 and 10 years) compared with 7.2% for UK listed equities and over 10% for global equities.
The investment case for being overweight UK listed equities, which tended to offer significantly higher yield than other equity markets, ran throughout the 1980s and into the 1990s.
The UK’s partial imputation corporation tax system (1973–1999) generally favoured dividends over retained earnings. By allowing shareholders a tax credit for corporate taxes paid (via Advance Corporation Tax, or ACT), it reduced the double taxation of distributed profits.
This encouraged UK companies to pay dividends, particularly benefiting pension funds (which were exempt from income tax anyway) as well as individual shareholders, until the system was “reformed”, by one of Rachel Reeves’s predecessors, Gordon Brown, no doubt on the basis of HM Treasury advice.
That same Chancellor also sold off a lot of our gold reserves at, with hindsight, very low values compared with today. Again, no doubt this was on the basis of HM Treasury advice at the time.
Since then, UK corporate tax has favoured debt (by allowing deductions for interest) and penalised dividend policies (by increasing individual taxation of dividends).
Tax breaks for private equity managers seem to favour the managers rather than their clients.
As trustees during the 1980s and 1990s, we did overweight UK listed equity to good effect, but we also diversified into European equities (when euro membership was a possibility) and particularly into global equities.
I find myself agreeing with Tom
and others at this present time.