HMT and PLSA need a compelling reason for employers to take investment risk

Posted on June 7, 2023 by henry tapper

“Pension funds are open to increasing investment in UK growth provided it is in the interests of the savers whose money we manage.”

This is how Nigel Peaple, PLSA’s senior policy wonk (Director of Policy and Advocacy, concluded a call to action to get pensions investing again

The facts are that UK pension schemes don’t invest much in the UK, don’t invest for growth and in many cases don’t invest at all. Why should they, they are agents of their sponsors and governed by a risk-averse Regulator.

Rather than investing in UK growth, they match liabilities to assets using the gilt markets to reduce risks to sponsoring employers of nasty surprises. Where there is investment, it is to play catch up and as many speakers at yesterday’s conference confirmed, most pension schemes are no longer having to take any risk to meet their liabilities, such is the benefit they get from the misery of high interest rates.

The 12 interventions the PLSA are calling for , are beneficial nudges  to get pensions to take more risk, both with the DB schemes, which are the primary concern of its investment conference, and in DC schemes – which don’t seem to be getting much of a look in. They stop short of calling on TPR to scrap its DB funding code and certainly don’t embrace the idea that DC schemes should be mandated to invest in the UK in growth stocks

These “interventions” range from making suitable investment opportunities available to mandating that those advising on pensions fall under the auspices of the FCA. They call on Government to mandate savers pay more into pensions through auto-enrolment and that the big DC schemes swallow up small ones to get scale. They look to further fiscal incentives to make investment in UK growth more attractive and – in the only area where substantial investment in UK growth is happening (LGPS) they call on more regulatory resource. A lot of their agenda is frankly a little self-serving, they are not interventions that encourage employers to take more risk either with DB or DC pensions.

Irrational exuberance from the Treasury

Treasury calls for growth still lack credibility

This long wish list was delivered as Treasury Minister Andrew Griffiths turned up on a screen demanding that pension schemes invested in UK growth as a celebration of their capacity to take risk.

A less likely set of entrepreneurs than those assembled in Edinburgh it would be hard to imagine. After decades of being taught to eliminate risk and demand more from employers to replace the opportunities of investment growth, delegates looked decidedly unimpressed with having the role of venture capitalists , thrust upon them,

Those journalists I spoke to sensed this, and nobody was that impressed that the best the Government could do was to send a pre-recorded video with no opportunity to comment.

The mood in the hall wasn’t helped by Danny Blanchflower, former BOE rockstar, telling the conference that Andrew Bailey & Co were getting it all wrong and prolonging the agony for British industry and mortgage holders by maintaining interest rates at current levels.

Of course , if Britain was to follow what America is set to do and return interest rates to QE levels, the pension schemes which are now sitting in theoretical surplus would be left like the naked man when the tide goes out. As Emma Douglas said, never has such a gloomy message been delivered in such an upbeat way. For pension schemes to consider investing for growth, they need interest rates to remain high. Mr Blanchflower was met with tepid support,

The conference’s first day also contained an “everything has changed, nothing has changed” session from a variety of proponents of LDI and a representative of the FCA who had little she could say, so triumphal were the assembled trustees , consultants and LDI managers. They were basking in the newly found solvency of DB pension schemes that had suffered a £500bn haircut in their assets in 2022 in meeting collateral calls to remain 100% hedged. There was no dissenting voice – LDI will it seems roll on, this time buffered by cash to insulate the hedge from the next liquidity crisis.

Dissenting voices were few and far between. John Hamilton of Stagecoach joined a call from the hall that the Government was looking to nationalise pensions by explaining that pensions were already nationalised. The vast majority of future payments of pensions in corporate DB will be backed not from investments but from Government securities.

The mood of the PLSA Investment Conference

Right now the PLSA has a lot going for it. Pension Schemes in surplus, markets holding up, interest rates set to remain high and a notable absence of CBI style scandal .

But it is a fragile mood, the events of 2022 seem to have dented confidence, the old certainty that there was not enough in the pot to pay the pensions has been swapped with an unease, that despite seeming solvency, asset coverage of future payments has been diminished. Nobody feels in the mood to celebrate as Andrew Griffiths was demanding.

We will hear today and tomorrow how ready DC schemes are to embrace the new investment paradigm. Right now, most master trusts (other than Nest) are talking a good game but only dipping their toes in the water with regards UK growth.  The PLSA’s policy measures to get DC investing miss the central problem , that employers do not want their members in anything but passive funds , priced at a few basis points.

Unless the sponsors of DC and DB schemes buy the Andrew Griffiths message, there is precious little that trustees, consultants and fund managers can do. What was missing yesterday was any reason employers will want any more risk in their pension schemes than they currently have.  Currently employers are quite happy taking no risk – they need to be bought into the UK Growth message and they aren’t in the room.

The Government’s recent Growth plan is being replaced by another

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How does the gender pensions gap work for couples?

Posted on June 6, 2023 by henry tapper

Most women operate within partnerships, usually with men , quite often with other women. We know too little about the impact of pension sharing – whether it be voluntary or by court order, but this is important. The Government analysis shows that the Gender Pension gap widens as women become carers – both of children and of wider families, women’s pension contributions and earnings only converge with men’s in the final years of careers – when caring responsibilities are likely to be more even.

So what is the deal we make within our marriages and partnerships? Are we creating a financial dependency by women on men’s pensions that is crystallised on separation? Do women have the comfort of knowing that they have rights to household income? Or is the unspoken rule “what’s mine is mine and what’s yours is yours”?

“Equalisation” is a thing in many parts of pensions. Sometimes it works against women (as with Unisex annuities) , sometimes it provides parity at a cost that diminishes everyone (as with GMP equalisation) and sometimes it is genuinely useful (take the proper implementation of pension sharing orders).

For progress to be made on financial equality we will need to better understand the bigger picture. The DWP’s focus is deliberately narrow and aimed to show up inequalities in private provision, but state pension provision is critical too. Many women who have historically paid NI at the lower married women’s rate or who are not accruing state pension credits because they are not claiming them, will find they are short of their maximum state pension. We need to add in state pension inequalities to assess “gaps” either at the macro or personal level.

There are no longer any special state pension arrangements for married couples. Each partner in the marriage or civil partnership needs to build up their own state pension through qualifying years, and cannot benefit from their spouse’s state pension (which will cease when that person dies).

The WASPI issue is theoretically about equalisation but has served to highlight how little financial security many women feel they have in later life. I do not think we can go back to different state pension ages or even compensate WASPI for the poor communication of change, those who feel insecurity, need rights to equal ownership of household income and/or better awareness of pension credit. The DWP’s efforts on the latter are commendable.

As regards financial services, bias’ within products have diminished as we adopted anti-discrimination policies from the EU. But product bias cannot prevent unequal contributions that result from the labour market. Implementing the 2017 AE reforms is likely to partially address the problem that many women are not included in AE. Addressing the net pay anomaly will precent many women from overpaying pension contributions and missing out on their promised incentives. These adjustments go some way to reducing the gender pay gap but they don’t provide women with the right to an equal share of household wealth.

In summary

  • So long as single women aren’t confident of their rights, there is more work to do.
  • We need to have a better discussion about women’s rights within marriage and partnerships
  • We need to provide more support to women who are on their own and especially those who don’t have access to financial guidance and advice.
  • The DWP need to think more the impact of relationships on the gender pay gap and focus on issues of dependency as well as independence.
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Don’t like to MOVEit MOVEit.

Posted on June 6, 2023 by henry tapper

Until this week MOVEit was promoted for its secure file transfer software

MOVEit file transfer software has been found vulnerable to Russian hackers . This is how Sky news is reporting the story.

The BBC, British Airways and Boots have been caught up in a cyber incident that has exposed employee personal data, including bank and contact details, to hackers.

A ransonware group named Clop has claimed responsibility for the breaches centered around the MOVEit file transfer software.

In an email to Reuters on Monday, the hackers said “it was our attack” and that victims who refused to pay a ransom would be named and shamed on the group’s website.

Work by Microsoft had earlier suggested that the Russian-speaking ransomware gang was behind the attack.

It emerged last week that a so-called zero-day vulnerability – a flaw – in the file transfer system MOVEit, produced by Progress Software, had been exploited by cyber criminals.

It had allowed the hackers to access information on a range of global companies using MOVEit Transfer.

Thousands of firms are understood to be affected.

This is truly frightening for firms using Zellis payroll software. Zellis provides payroll support services to hundreds of companies in the UK and it has used MOVEit software till it disconnected its servers from it , this week. Too late sadly for the above mentioned firms and to many more waking up to implications of compromising employee’s  staff and national insurance numbers.

A welcome distraction for Capita?

Meanwhile Capita must feel some relief for not being today’s cybersecurity focus. It needs one.

Yesterday we heard that it will be losing its contract to provide pensions administration to the Teacher’s Pension Scheme

Capita’s final extension to the contract was for four years – taking it to October 2025. It was believed to be worth around £15m a year.

Tata Consultancy Services announced this morning that it would be the new operator, having been selected by the Department for Education to ‘administer and enhance’ customer experiences for the Teachers’ Pension Scheme in England and Wales.

I do hope that the change of contract was not a knee-jerk reaction to Capita’s cyber-breach.

We should not throw the baby out with the bathwater , we must make sure that strong well-run businesses are maintained in this country. Our resilience faced with malign ransomware attacks extends to supporting firms who are the victims of them. There but for the grace of God go we.

Perhaps this second major cyber-security breach may demonstrate the vulnerability schemes have not just to their primary but their secondary suppliers. We are almost all in the chain, and it’s a very scary chain when a link gets broken.

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The Gender Pension Gap dwarfed by impact of not getting a DB pension

Posted on June 6, 2023 by henry tapper

It is good to see a Union get behind a Conservative led Government initiative. Laura Trott has come in for some (IMO unwarranted) criticism for her recent performance on question time and I share with Prospect admiration for this report.

Yesterday saw a step in the right direction for addressing the Gender Pension Gap with the Government announcing the way it plans to measure and monitor it

As the pension industry congregates in Edinburgh today, it’s worth remembering that our agenda and the Government’s should be aligned. Unfortunately I see very little of Government at the PLSA Conference and hope that the timely publication of this report will remind us that there are bigger issues facing the country’s pensioners than can be dealt with by Pension Investment.

The Gender Pension Gap is defined by private pension savings

The DWP defines the Gender Pension Gap (GPeG) as the percentage difference between female and male uncrystallised median private pension wealth around normal minimum pension age (55)  for those individuals with private pension wealth. Uncrystallised private pension wealth includes that which is active or preserved, therefore not in payment.

  • the most recent data (2018to 2020) shows a GPeG of 35%
  • for employees eligible for AE, their GPeG is 32%

So “pensions” is defined in terms of pot not income. These figures do not relate to state pensions and benefits or the wealth accumulated outside of pensions. “Uncrystallised” means – before people have started drawing income and stripping out tax-free-cash. It includes income from DC and DB pensions.

Put at its simplest, women are more than a third less wealthy than men from the workplace pension system and though AE is making a difference, for people solely reliant for their pot on AE contributions that difference is only narrowing the gap by 3% of total wealth.

What difference is auto-enrolment making on the GPeG?

The observation on AE needs to be seen in the light of the overall UK pension system, the labour market, as well as personal choices and circumstances.

  • the participation rate for AE eligible female and male employees across the whole economy in 2021 was 89% and 87%, giving an AE participation gap of minus 2ppts.
  • among adults aged 16 to 64, the male employment rate in 2022 was 79% and the female employment rate was 72%.
  • the total annual contribution into workplace pensions for AE eligible female and male employees in 2021 was £52.0 billion and £62.6 billion, giving a contribution gap of 17%. This means the percentage difference between the total annual contribution into workplace pensions for AE eligible men and women is bigger than the percentage difference in the employment rates.

More women participating in pensions – less money going into their pots. That  % difference in contributions is bigger than the difference in employment rates, meaning that while more women participate, they get less paid into their pots.

Auto-enrolment is reinforcing the pensions gender gap though  at a slightly slower pace.

Put another way, without AE and with no pensions at all, women would be even worse off, both in absolute terms and by comparison with men

What does this look like in pounds shillings and pence?

These are the figures for those who aren’t contributing using auto-enrolment

These are the figures including AE workplace pensions

AE is providing more wealth and is slightly reducing the GPeG ( as mentioned above)

The Gender Pension Gap is smallest when considering private pension wealth held by individuals with both Defined Benefit (DB) and Defined Contribution (DC) pension wealth, compared to individuals with only DC wealth or only DB wealth.

What this third chart shows is that the biggest problems for women are around the lack of DB wealth. Where a woman has only DC wealth, she is likely to have 60% less wealth than her male counterparts.  But the actual amounts of wealth for DC only savers are around  1/6th of the wealth with those on DB. This is a different story but one which is even more important.

This is because the group with the highest GPeG of 60%  is the largest in size with 792,000 men and 575,000 women. The second most common type of pension wealth is DB only with 423,000 men and 589,000 women.

This group has a GPeG of 44%. The smallest GPeG of 34% is within the group of those that have DB and DC pension wealth. This is also the smallest group in size with 414,000 men and 321,000 women.

This tells us that though auto-enrolment is helping, if people don’t have DB wealth, they are – whether men or women, in pension poverty (at least in terms of privately accumulated “wealth”).

As far which age-bands see the widest GPeG , the GPeG is driven by labour trends

The size of the GPeG varies according to age bands. The GPeG is smallest for those aged 35-39 (10%) and then increases to 47% for those aged 45-49. The GPeG then decreases again in the later years of working life. This pattern is similar to the trajectory of the Gender Pay Gap which shows a relatively small gap until the age of 40 when it approximately triples due to different labour market trajectories of men and women.

With less and less DB accrual amongst younger workers, the bigger consideration is that the “have nots” of chart 3, tend to be younger. The sad conclusion that we must take away from this report, that the biggest determinant of pensions wealth is not gender, but access to defined benefit accrual.

Although the report wrings some comfort from the success of AE to narrow the GPeG , the reality is that the collapse of DB accrual in the private sector dwarfs the problem with gender inequality. As a nation we are the worse off for losing DB, but in gender pension terms, a poorer DC system may be slightly less unequal in outcomes.

Questions  left unanswered

The report notes that during the first decade of the century, the GPeG halved and has since increased, touching 40% at one point. No explanation for this is given in the report and I’d be interested in answers (henry@agewage.com or use the comments box)

It would also be interesting to know what the gender pension gap is for the state pension.

 

 

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“The next European financial mess is unlikely to start with a bank”

Posted on June 5, 2023 by henry tapper

Thanks to Robert Armstrong of the FT for the quote and  to the ECB for providing this handy table, which serves as a sort of glossary of how things can go wrong:

The thing that seems common to the stress events were that they weren’t triggered by a bank but are what everyone now calls “secondary banking”, where the banks are one stepped removed from the action.

There’s a lot of commonality about what has gone wrong and those involved in the LDI stress event can take some comfort that they weren’t alone in employing excessive leverage backed up by inadequate liquidity preparedness and contagion through herding.

I notice that one of the sessions at this week’s PLSA conference is entitled “LDI and risk management -what could possibly go wrong (next)” – a very good title indeed as the people at the session will undoubtedly be the people who at last October’s Conference were telling each other that nothing was fundamentally wrong with LDI.

The Government has worked out that the £4trillion of assets in pensions could save the UK’s ailing economy, it may also have worked out that the £4 trillion of liabilities, if continued to be managed as they were, could sink it.

 

 

 

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Former regulator slams transfer regulations.

Posted on June 5, 2023 by henry tapper

David Fairs

LCP are promoting a blog by new partner David Fairs, until recently Executive Director of Regulatory Policy at the Pensions Regulator,  calling  for rule changes to allow more people to benefit from ‘freedom and choice’ in pensions.

Fairs points out that whilst those with DC pensions have been able to benefit from greater flexibility since 2015, there are barriers to those with DB pensions enjoying the same flexibility.

These barriers were put in place to obstruct the rush to transfer last decade when transfer values were often twice what they are today due to the tyranny of discount rates that valued DB liabilities based on artificially low gilt yields. Advisers were able to charge their advice to the transferring pot on a no-win no fee basis and for a time – CETVs were described as “no brainers” by those at the Port Talbot factory gates and FT journalists, even Ros Altmann got in on the act, promoting the joys of DB transfers to the affluent middle classes.

LCP and Fairs clearly look back to these times fondly, not only were members happily transferring risks to themselves, but LCP clients were benefiting from not having the risks on their balance sheets. Though transfers were obscenely high, they weren’t as high as the marked to market liabilities they removed. The press release accompanying David Fairs blog is elegiac.

But in recent years, the supply of high quality advice has diminished, and the cost of advice has soared, partly as advisers have faced rapidly increasing costs, including securing professional indemnity insurance.

The reality is that the advisers who were instrumental in “de-risking LCP advised schemes” are facing an existential threat resulting from many of these transfers being deemed “bad advice”. Many have no professional indemnity to cover future transfers, many are in administration or have been liquidated.

LCP meanwhile continues to promote the idea that members should be able to swap a defined benefit promise for cash, drawdown or a rollup of a DC pot – to pay the IHT bills. But they and their clients are frustrated to see the transfer flow drying up, not just because transfer values are now half of what they were, but because there are no advisers left to promote to their clients that they take the risks individually, that trustees struggled with – collectively.

The LCP solutions

David Fairs highlights two potential solutions, the second of which would require legislative change:

  • For more DB schemes to appoint a nominated firm of suitably qualified transfer advisers who members can use with confidence that ‘due diligence’ has been undertaken on the firm; even if the scheme only covers the set-up costs of the new advice arrangement, members will generally then pay far less for advice than if they source their own advice from a ‘high street IFA’.

This is a variant of the “incentivized transfer” concept advocated by benefit consultants that triggered the dash to cash by DB members. Steve Webb, another LCP partne, but at the time pensions minister, told the NAPF in 2015 that this process was the flashing of “sexy-cash”. That was then , this is now – you will need a lot more sexy cash to incentivise transfers today. You will need to find IFAs who are not still bleeding from assisting corporate pension advisers back in the day (think LEBC). The “de-risking exercises that encouraged ETVs and PIEs were carried out in full view of the Pensions Regulator. When the FCA intervened, TPR protected the corporate advisers and trustees and threw the IFAs under the bus.

I suspect that most advisers would  tell LCP today “once bitten- twice shy.

  • A change in the rules to allow people with modest DB pots to access drawdown under the umbrella of their DB arrangement either directly or via a carefully chosen third party such as a mainstream drawdown provider or (in due course) a CDC vehicle. The obligation to take regulated financial advice would be lifted where the option was within the same umbrella DB arrangement, but guidance would still be provided. Trustees could be required to ensure that any third party provider was authorised, that any investment options were appropriate and that charges were fair. This would, to some extent, mirror the duties which trustees are already under when it comes to vetting potential transfers under the latest anti-scam rules. From the member’s perspective, this would be a much smoother process than transferring out of the Trust altogether and having to source full financial advice, but would still provide good protections for the member against being scammed or selecting an unsuitable or high cost product.

This is the idea – much beloved of consultants – that trustees can create “safe harbour” solutions where the risk of things going wrong is assumed by third parties – in the extremity- the tax-payer – the insurer of last resort. There is a lot that can go wrong with drawdown and trustees of DC schemes have shown no appetite for taking on drawdown risks so far – even where those risks are managed by a third party provider – vetted presumably by another third party. The risks of investments going wrong , of members living too long and of advisers and providers going wrong are evident whenever you pick up an advisory trade magazine.

Running a safe harbour CDC scheme for members to swap a guaranteed pension for an accelerated non-guaranteed pension, within a single trust, suggests that trustees of DB schemes would have responsibility for the establishment and maintenance of such a scheme. Once again, this is fanciful. The only beneficiaries of such an arrangement will be the commercial entities providing professional services to the CDC. Once again, the risks will not be off-loaded, they will sit within the trust, albeit on the member’s not the corporate balance sheet.

Time to start again on transfers?

In his blog, Fairs seems to conflate the transfer regimes for DB entitlements and DC pots as “sticking plasters on an ineffective process”.

“The current requirement on members to seek Financial Advice if their benefit is over £30,000, the transfer regulations and requirements to flag amber or red transfer requests and referral to MoneyHelper are sticking plasters on an ineffective process.

David Fairs suggests a “fresh look” arguing that the process we have ended up with, is not fit for the member’s process. But this flawed process was created on his watch when he was at the Pensions Regulator. It takes some chutzpah to decide that because the process is no longer working for his clients, it is wrong.

For members to put themselves through such a tortuous and expensive process clearly demonstrates that there is a need for flexibility beyond that currently offered by DB schemes.”

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Don’t let Workplace GPPs get left behind

Posted on June 5, 2023 by henry tapper

There is a very real chance that millions of personal pensions set up to comply with auto-enrolment will become unloved deferred small pots as their employers switch to participating in master trusts and GPP providers start to consider the GPP structure as “legacy”.

There are a number of reason why this might happen

Regulatory – if you are in a GPP the contract is between the saver and the provider of services (typically an insurer but also a non-insured SIPP such as Hargreaves Lansdown). Member communications are treated as financial promotions and subject to FCA rules, including the consumer duty. This makes it harder for large consultancies who advise on workplace pensions, to involve themselves at member level without giving advice.

Transferability – consolidation is the name of the game and the only thing that consultants and employers can control with a GPP is the ongoing flow of new contributions. While most insurers have come expert in moving active members’ deferred pots from a GPP to their master trust, these “sweeps” do not tend to cover deferred members. If a “sweep” involves moving members away from an insurer to a new provider’s master trust further issues arise as any “bulk transfer” involves negotiations between different commercial interests. All transfers require member consent, this is not the case for transfers between master trusts.

Commerciality – the issuance of policy documents and the maintenance of personal contracts make GPPs more expensive to run than holding the equivalent members in a master trust. This extra expense is not rewarded. There is no clamour from members to have their own pot and employers find they are disadvantaged in price negotiations with master trusts if they cannot leverage the value of deferred member pots.

Collectivity Workplace GPPs are looking distinctly unloved and with talk of a new decumulation regime for master trusts working on a collective rather than individual basis, the strategic direction for larger employers is towards multi employer trust based arrangements that can manage member decision making by default. The investment pathways, made available for non-advised GPP savers have not attracted support from employers, consultants and most importantly – savers taking retirement decisions

Changes in the advisory market – last but not least, the market among corporate financial advisers to offer GPP services has dwindled. Many large IFA networks have more or less moved out of “workplace” advice and the focus is very much on developing retail rather than corporate arrangements. The Retail Distribution Review, the banning of consultancy charging and the growth in advisory fund platforms has made the workplace GPP a marginal product, very few are being set up and many which were set up on an advised basis are no longer so.

Pricing ; the primary driver for employers actively reviewing their workplace pensions is to reduce the cost to members of what is seen as a commoditised product – the accumulation of money in DC pots. For all the reasons above, the GPP is becoming, pot for pot, more expensive than the master trust and since GPPs struggle to show “value” in other ways, they are being considered as second class and even “legacy” products.

Stranded pots?

While the bulk of the Government and Industry’s small pot problem comes from newly enrolled members of master trust whose contributions come from jobs that barely qualify them as “workers”, there is a secondary issue for GPPs, many of which were set up prior to auto-enrolment and now contain more deferred than active members. Transferring a workplace personal pension on an individual basis is an increasingly fraught business with many people who try finding themselves referred to the Money and Pension Service after red or amber flags have been thrown by ceding administrators.

This is not necessarily, protectionism from ceding arrangements, the rules laid down for transfers were established to protect savers from being scammed. Since small pots are generally transferred on a non-advised basis, the use of discretion is limited. Stories of people finding their pots stranded when they try to move them make the headlines, what don’t make the headlines are the millions of pots which aren’t moving, for want of advice and an easy consolidation mechanism.

Stranded GPPs

The threat of GPPs becoming second class “legacy” products is very real. Legal & General, Aviva, Scottish Widows, Aegon, Standard Life and Fidelity all run master trusts and GPPs and all are finding themselves competing for new business with their master trusts – not their GPPs. Among the workplace pension providers, only Royal London and Hargreaves Lansdown offer a GPP as their flagship workplace pension.

The worry, and this should be a particular worry for IGCs in particular, is that GPPs get consigned to “legacy” status in the way many AVC contracts have been. This typically means lower value for saver’s money for GPPs with less attention paid to product and service development.

The attention of the large consultancies who provide the bulk of support to employers and trustees with workplace pensions is elsewhere and the GPP is in danger of being left behind.

 

 

 

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What are God’s gender pronouns?

Posted on June 4, 2023 by henry tapper

 

Methodist Central Hall

 

We’ve just read the Nicene creed. God no longer came to earth as “man” but as “truly human”. I like the change.

I am uncomfortable with the portrayal of God as the patriarch and would prefer to pray once in a while to “out mother”.

This is not me being arsey-woke, it’s me being a 61 year old man who is trying to readjust to a world that should include ideas of God relevant to our ideas of women.

And however awkward “our mother” is in the Lord’s prayer, it makes me think positively about gender in a way that all this “he” stuff doesn’t.

The language of the church  challenges me and puts me off.  I am aware – it carries the tradition of millenia, but in an age where every other conception has been challenged, why not the conception of our divine parentage.

I decided to look into this and to my great surprise, the Methodist Church has been here before,. This article is from the BBC Website in 1999 suggests that Methodism has been looking at inclusivity a lot longer than I have.

The Methodist Church is publishing a new service book, which challenges the traditional Christian understanding of God as masculine.

The BBC’s Alex Kirby reviews the new Methodist worship book

The changes to the current worship book, which has been in use since 1975, reflect Methodism’s search for inclusive language and its efforts to learn from the experience of other churches.

In one of the new services, God is addressed as “our Father and our Mother”.

The book took eight years to produce, and 15 senior Methodists were involved in its compilation, meeting 30 times before reaching final agreement.

They point out that medieval Christian writers, like Julian of Norwich, used to refer to God as Mother, and that there are Old Testament precedents as well.

But they reaffirm the orthodox Christian doctrine that God is, in essence, neither feminine nor masculine.

The Reverend Norman Wallwork explains why a new service book was wanted

One member of the working party, the Revd. Norman Wallwork, a Methodist minister from Somerset, says the impetus for the new book came from the search for inclusive language.

But he says there was opposition from many Methodists to the idea of addressing God as Mother. It was a vote in the Methodist church’s annual conference that settled the matter.

Would I want a divine family? Yes I would, because I feel uncomfortable that Mary the mother of God is not divine, or even married to God.

Elgar’s Dream of Gerontius was bowdlerised to snip out references to Mary’s semi-divinity and many protestants would prefer not to consider the holy spirit as planting God’s seed. But Jesus did come from her tummy.

If I can stretch to the idea of an immaculate conception, I can stretch to the idea of a divine mother.

If God had a lnked in profile – shouldn’t the given pronouns be he/she?

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Is this the way to invest capital productively?

Posted on June 4, 2023 by henry tapper

There’s a lot of talk about superfunds over the past few weeks. Here is a superfund that has already been created and is “oven ready”.

I am a 61-year-old with a pension pot, considering how my money can work as hard as I have done these past 40 years. Having started my working life in 1983, I have a reasonable hope that my money may be invested for my benefit till 2063, by which time I will be 100. The 100-year life is not an abstract notion, it is a target for me, for my health and for my wealth.

This post asks some of the questions I ask about investing in private markets and a lot of questions I don’t have the competence to ask – but form a part of other people’s due diligence. It’s a tough one to read and hard for me to edit – I’ve left it as I was sent it.

 Edi Truell runs Disruptive Capital and has shared with me, a discussion he has been having with potential investors in his solution for pension funds and long term savers –Long Term Assets Ltd.

What follows has been provided me by Edi and was created by the team at Disruptive Capital GP. It is of course a financial promotion and those reading this blog will have access to purchasing shares using the London Stock Exchange

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  • High allocation to secondary and direct investments, and use of C Shares and Quoted Investments to minimise cash drag

World-class management & governance

  • Disruptive Capital with extensive track record over 30 years, demonstrating:
    1. exceptional above-market returns across private markets;
    2. low loss ratios, even in bad markets;
    3. strong risk management;
    4. highly contrarian investment style
  • Valuable expertise of Board and Strategic Advisory Committee, comprising veterans in pensions & private markets
  • Long-term investor access to low-cost, easy investment into private markets, run to the highest standards of governance:
  • Gold-standard governance and transparency rules of the London Stock Exchange
    1. Oversight of an independent board with highly experienced private market investors
    2. Independent AIFM
    3. Grant Thornton audit, EY valuation review and MJ Hudson / PERACS track record review
  • Positive Impact philosophy reinforced by charity holding 17% of Long Term Assets
  • First right of refusal on all private market transactions generated by Disruptive Capital

Listing & liquidity improvements

  • London Stock Exchange listing to help shareholders, current and prospective, with their liquidity and Level 1 eligibility needs
    • Whilst being invested in real return-generating assets
  • Negotiations underway to bring in steady stream of fresh cash and private market assets from pension funds and asset owners
  • Exchange Offers to bring in illiquid assets
    • at appraised NAV
    • to give holders Level 1 liquidity via listed Ordinary shares
  • Listed C share ‘side pocket’ for ineligible/”difficult to value” assets
    • to give Level 1 treatment whilst they are being realised and
    • then transferred into the main fund at realised value

Discount management

  • Intention for systematic market purchases, to the benefit of the new investor, where shares are trading at a discount post listing
  • Share buybacks
  • Share tenders at 99% of NAV, from fresh cash, realisations and use of liquidity lines
  • Highly competitive management fees, with clawback provisions against ‘fees on fees’ avoids the ‘present value of excessive fees’ discount

Questions:

Are interests of shareholders and manager aligned? 

Truell Conservation Foundation charity and Truell family interests

  • own over 75% of the shares at Listing
  • own the Investment Manager
  • have injected a slice of every private market investment they hold
  • hold further shares in the portfolio companies
  • also control Pension SuperFund Capital which should be source of future investment into Long Term Assets
  • exclusivity over future deals

With a low fee base, management fees are a fraction of the expected income. Shareholders want to make long term returns from the shares, not management fees

Performance fees are subject to an hurdle rate of return of typically 8% p.a.; andare largely payable in Long Term Assets Ordinary shares, not cash.

These structures align the interests of the Investment Manager and shareholders as well as avoiding cash strain.

Asset Performance – can you provide some detailed colour on the performance of the Disruptive investments over the years?

The detailed analysis of the Disruptive Capital portfolio performance is provided in this presentation

In summary, Disruptive has shown

    1. exceptional above-market returns across private markets, making:
  1. 29% net IRR in private equity over 30 years . High ‘alpha’ of +22% above private equity market
  2. No losses in cash management over 10 years, whilst generating ±0.30% over LIBOR strong risk management;
  • ex ante high risk investments managed to exceptional outcomes
  • prudent use of leverage
  • low loss ratios, even in ‘down markets’: lossmaking percentage of deals is only 7.3%;
  • 92.3% of investments were profitable in ‘down markets’

Niche investment

Virtually zero correlation to private equity peers

Highly contrarian investment style

Would it not be cleaner to just raise capital in a blind pool to buy LP interests? 

Disruptive has raised billions over the years in private market funds.  However, the key feedback we have had from government, industry groups, pension funds and their advisers, is that they want to see a listed vehicle that gives:

  • access for all long term savers to private assets, including DC and personal savers
  • provides a “readily realisable and transferable” asset
  • gives better value for ’sellers’ than the secondary market, especially when they do not want to sell, but want to have a liquid asset with the option to sell/transfer
  • gives the prospect of income and long-term capital growth

TPR has set out for us in its guidance and subsequent communications its conditions precedent for investment in – and inheritance of – private assets.  This has been reinforced by the DWP, FCA and Treasury.  The key requirements are:

  • Readily realisable and transferable
  • Valuation transparency, reinforced by regular valuation reporting
  • Independent governance and audit on the management of the portfolio of private assets
  • Private assets must be sold or transferred to a listed vehicle within one year of take on

These objectives can be achieved by readily tradeable listed shares with the further advantages of:

  • Being easier to transfer as part of a buyout or consolidator transfer
  • Better capital treatment from the insurance and pension regulators (including the PPF in respect of levy calculation) as a ‘Level 1’ asset, vs ‘Level 3’ for unlisted private assets
  • Avoiding being a forced seller

Why would GPs agree for interests of their funds to be sold to a publicly listed vehicle that isn’t providing primary capital and is publicly listed? 

  • Expectation of raising very substantial primary capital funds, as well as secondary exchange offers
  • Management has 30 years in the market, both as a GP and as a large LP (for example at London Pension Fund Authority or at Pension Insurance Corporation).
  • GPs tested to date are attracted to the model and to be seen to help their pension fund customers knowing we can commit primary capital to their next fund; or agree a segregated mandate / co-investment arrangement.
  • Unlike most LPs, we have deep and successful experience of private markets. We can contribute to their deal flow, to their investment appraisal and even strategic portfolio company development. As an LP, we corner-stoned Schroder Adveq’s first private equity co-invest programme, doing 17 deals. We corner-stoned Permira Debt Managers first, second and third funds, drawing on our prior experience running Europe’s largest leveraged loan non-bank funds. We corner-stoned CatCo from inception, drawing on our insurance market experience. Other examples are available upon request.

GPs tend not to want to deal with publicly traded LPs because of disclosure requirements. 

We have found that good GPs are happy for their overall fund performance to be reported publicly.

Where LTA has to be careful is the reporting of underlying portfolio valuations, especially where such portfolio companies are being prepared for sale.  It would be to the disadvantage to such as process.

How are you managing liquidity for capital calls, redemptions, fees.  What stress testing have you done? 

We do expect to raise very substantial primary capital funds, as well as secondary exchange offers.

As well as primary capital, we have lined up substantial backstop capital lines, of up to 25% LTV.  Of course, we expect the underlying portfolio to produce a good yield; and PE realisations.

We will not take on unfunded capital calls unless we have the capital to hand, whether from the ‘seller’ or elsewhere (or preferably both).

Redemptions are ultimately discretionary if there is insufficient cash to hand.

How have you determined the value of the investments already in the fund?

The value of the initial investments has been independently produced and verified at several layers by Herbert Smith Freehills and Swiss counsel; as well as being audited by Grant Thornton and EY have just completed a further independent review of the 30th Sept 2022 valuations

The valuations are first based on the Disruptive Capital estimated fair market values of the Company’s investments.

To provide the Company greater comfort around the internal valuation of the Investment Manager in relation to the investments in the Expected Portfolio, and in order to mitigate the conflict of interest, the Company instructed an independent firm of accountants, Grant Thornton, first to perform agreed-upon procedures on the Investment Manager’s valuations of the investments in the Portfolio, and to report its findings to the independent Directors for their consideration. These valuations were then incorporated into the 31/3/22 audit.

The unaudited interim valuation as at 30/9/22 was reviewed by Grant Thornton.  However, as they are the auditors, they cannot perform an independent valuation.  This has been undertaken by EY.  The results of their findings confirm the reasonableness of the 30th Sept 22 values.  Further refinements to the valuation methodology will be incorporated in to the 31/12/22 valuation and reporting.

The Portfolio comprises Direct Investments in unquoted, hard-to-value assets as well as investments in Fund Investments themselves holding unquoted assets. This exposure to unquoted assets will exacerbate the risk of variation between the Company’s estimated valuations and the realisable values of its investments. Accordingly, the Net Asset Value figures issued by the Company should be regarded as indicative only and investors should be aware that the realisable Net Asset Value per Share may be materially different from those figures.

The value of the Fund Investments will normally be based on the values provided by the Relevant Manager or administrator of such Fund Investments. The Relevant Manager or administrator (as the case may be) may face the same challenges in relation to valuing the underlying investments of the Fund Investment as the Company does in relation to Direct Investments (as set out above). The Investment Manager or a Sub-Manager (as applicable) may, at their discretion, query the valuation provided by the Relevant Manager or administrator of the Fund Investment and recommend an adjusted valuation where it does not believe that the valuation provided represents fair value.

There is no single standard for determining the ‘fair value’ of an asset and, in many cases, fair value is best expressed as a range of fair values from which a single estimate may be derived. The types of factors that may be considered when applying fair value pricing to an asset include: the historical and projected financial data for that asset; valuations given to comparable assets; the size and scope of the asset’s operations; the strengths and weaknesses of the asset relative to the market in which it operates; applicable restrictions or hindrances on the transfer or other disposal of the asset; industry information and assumptions; general economic and market conditions; and the nature and realisable value of any collateral or credit support.

Valuations of investments for which market quotations are not readily available are inherently uncertain, may fluctuate over short periods of time and are based on estimates. Determinations of fair value of investments may therefore differ materially from the values that would have resulted if a ready market had existed for those investments. Even if market quotations are available for the Company’s investments, such quotations may not reflect the value that the Company or a Fund Investment would be able to realise in respect of those investments because of various factors, including illiquidity, future market price volatility, or the potential for a future loss in market value due to poor industry conditions or the market’s view of the overall performance of an asset.

There is mention of co-investors agreeing to valuations for 80% of the assets. Who are those co-investors and what fee arrangements do they have in this fund? 

The co-investors are strategic investors investing in the underlying assets.

Examples include:

RTE (the French national grid operator) taking a stake in Atlantic SuperConnection.  ASC are working in partnership with RTE, Europe’s largest transmission network and a global leader in interconnector engineering & management, who already have a portfolio of six interconnector cables. Atlantic SuperConnection is developing an undersea interconnector cable to transmit up to 1.8GW of geothermal and hydroelectric electricity from Iceland to the United Kingdom, and is expected to commission by 2029.  ASC will provide the UK with reliable, green, baseload power at a fraction of the cost of nuclear, and without the intermittency of solar and wind. Interconnectors already account for 7% of Britain’s energy supply, and are recognised by the UK government as a key component of the country’s energy transition.

A €26bn market cap specialist producer of equipment for the life sciences sector, has just taken a 22% stake in Virocell.  Virocell operates out of Great Ormond Street Hospital and Royal Free Hospital, in the design and manufacture of viral vectors – the delivery mechanisms for a wide rnage of vaccines (incl Covid) and cell and gene therapies.

These co-investors have no economics in the Long Term Assets vehicle.

What’s the expected total expense ratio including at the underlying fund level once this is all up and running? 

The management fees and ancillary costs would expect to give a running rate TER at 0.58% at scale.

Performance fees are first of all subject to an 8% p.a. hurdle; and secondarily are largely paid in shares, not cash. This aligns interest as well as avoiding cash strain.

If the secondary market returns to a status of trading around par, how does LTA compete for LP interests?

Long Term Assets is primarily a vehicle for pension savers to deploy cash.  It has been designed for DC as well as DB pensions.

However, it has a secondary role in taking in assets, where it will apply fair value NAV to the offers made to acquired such assets.  it is ultimately up to the seller/transferor to decide to accept the Pension SuperFund Long Term Assets offer – or not.

Moreover, as PSF Capital goes ‘on risk’ with ceding pension funds and sponsors, so we expect to inherit private market investments already in ceding pension funds, as well as potential in specie contributions from sponsors.  We further expect fresh cash will be invested by those pension funds. It further may take in stakes in ceding sponsors as part of a risk transfer premium, which stakes would be injected into Long Term Assets.

Indeed, if the secondary market trades up to levels we regard as too high, then Long Term Assets may be a seller.

Why are the pension funds wanting to exchange private market assets?

When pension funds approach their end game solutions, insurance buy-out solutions do not accept private assets and hence through investment into LTA they can offer listed shares

Are you managing liquidity on a day-to-day basis?

LTA is a close ended fund.

We do expect to raise very substantial primary capital funds, as well as secondary exchange offers. Liquidity is in the first instance provided by the London Stock Exchange listing. Scale will bring greater liquidity and with it greater interest in the stock.  With index inclusion and the like, then proxies such as 3i would suggest that the stock will trade at or above NAV.

Investment Governance – can you please provide some colour on how investment decisions are made (committee structures etc,)?

The Investment Manager shall manage the Assets of the Company in accordance with the Company’s principal investment objective and policies as determined by the Board and approved by shareholders. Where the Investment Manager does not have appropriate in-house expertise it seeks to achieve the investment objective by appointing best in class Sub-Managers or advisers for each specialist market (“Manager Appointees”).  The selection process has been supported by market analytics prepared by MJ Hudson PERACS, and by due diligence performed by the Investment Manager.

The Strategic Advisory Committee

The Strategic Advisory Committee advises the Investment Manager on the management of the Portfolio. The Investment Manager benefits from the deep experience of the members of this committee, giving access to broader experience and cognitive diversity than the investment management team alone.

The role of the Strategic Advisory Committee with respect to the Manager is one of strategic direction and oversight. The Strategic Advisory Committee will not make discretionary management decisions in respect of the Portfolio. Rather, the Strategic Advisory Committee will consider and provide opinions and recommendations to the Investment Manager’s portfolio management team on the management of the Portfolio, the appointment of Manager Appointees, and the valuation and acceptance of assets as in specie subscriptions for shares.

The Board of the Company may at its discretion nominate one of the Directors to sit on the Strategic Advisory Committee as a representative of the Company.

The Multi Stage Investment Process

When considering an investment opportunity for the portion of the portfolio managed directly by the Investment Manager, it adopts a multistage investment process summarised as follows:

Stage A

Investments are initially screened for suitability by the Investment Manager at a high-level including factors such as: industry sector, target return, management expertise. This stage will screen out any potential investments that do not meet the Company’s fundamental requirements in respect of, inter alia, return characteristics, allocation targets, and ESG policies.  If these are met then a summary investment case is prepared for presentation to the Strategic Advisory Committee, who will recommend whether the Investment Manager should progress the opportunity to Stage B. Typically such recommendation will be followed by the Investment Manager.

Stage B

Internal ‘deep dive’ due diligence is commenced on the investment, covering the key financial, commercial, ESG, impact and legal aspects of the opportunity. The Investment Manager completes a detailed assessment, and a draft proposal is prepared for the use of third-party advisers should the opportunity be advanced to Stage C.  A full investment memorandum is then submitted to the Strategic Advisory Committee.  If recommended by the Strategic Advisory Committee, the investment will typically move to Stage C.

Stage C

Advisors are engaged by the Investment Manager to complete due diligence on the investment; this may include specialist M&A, ESG, tax, legal and industry / sector consultants as appropriate.  A detailed investment case is prepared including analysis of the performance of the company, its management team, its projections, the market in which it operates, and the investment and exit strategy.  A proposed deal structure is proposed and negotiated with the seller. A recommendation to proceed is presented to the Strategic Advisory Committee, which may recommend that the Investment Manager approves, declines, or seeks changes/clarifications to the proposal.

Will only funds that are considered Positive Impact can go into the LTA? 

Fresh investment will only be made in accordance with the ESG policies. Inherited assets will also be screened.  Whilst they are unlikely to all be “NetPositive”, the principle will be that they ‘do no harm’.  Where assets are deemed by the Board (ultimately) to be unacceptably harmful, they will not be taken on, even into the C Share ‘side pocket’. This side pocket does give the option of taking in assets that do not fit the criteria, and then can be managed out at the original owner’s valuation risk.

ESG policies are at the centre of each investment stage:

Stage A

Opportunities and mangers/sponsors are screened against LTA’s ESG policies. This is a core filtering hurdle, and non-compliant opportunities and managers are not pursued beyond this point.

Stage B

The management team or sponsor of the opportunity/fund is challenged to defend both their ESG policies credentials and any projected positive impacts. They are required to complete an ESG questionnaire and to provide and verify any impact metrics, projections, and underlying assumptions. This may feed into the establish of relevant ESG KPIs for the particular fund/opportunity in question, e.g. community impact, CO2 emissions prevented, trees planted, affordable houses created.

The findings of this analysis is included in the investment memorandum submitted to the Strategic Advisory Committee.

Stage C

The Investment Manager decides to proceed with the opportunity, moving into documentation. This documentation typically enshrines the aforementioned ESG policies and impact objectives where appropriate, either within the core transaction documentation (e.g. SPA, LPA) or a side letter.

Post-investment, LTA uses its influence (e.g board & advisory committee seats) to ensure fund and business decisions are not only aligned with long-term value creation, but also ESG policies and any impact objectives.

The Investment Manager is putting in place an ESG monitoring and reporting system and is basing this on the “NetPositive” principles described below.

How is Positive Impact defined?

Becoming a Custodian-Investor

The Investment Manager’s ESG policies are fully integrated into its investment process, constituting one of the main tests in its initial investment screening, right through to final investment decision. ESG policy is central to PSF Capital’s approach, as an all-reaching set of values and policies to ensure that fresh investments not only do no harm, but do material and long-lasting societal good by favouring “positive impact” investments. Within a pristine Governance framework, LTA is committed to being “NetPositive” from inception, adhering to the 12 principles devised by the Climate Group, World Wildlife Fund and Forum for the Future.

LTA has the expertise, and aims to have the scale, to make substantial fund & direct investments and so secure influential governance rights: and use these rights to ensure fund and business decisions are not only aligned with long-term value creation, but also our ESG policies. In this way LTA plans to become a “custodian-investor” in direct assets, taking its inspiration from the Canadian pension pools, amongst the world’s most respected and value-additive in the world.

In this way LTA invests in businesses it is proud to own, and aspires for those businesses to be proud to be owned by it.

Explain the clawback protection against fees on fees?

The Company will offset any fees received from portfolio management, corporate finance fees, etc, by an Investment Sub-Manager against the fees payable to the Investment Sub-Manager under the Investment Management Agreement.

Agreements pre-dating the IMA are excluded from this.

Is your 12.5% performance fee on top of the 20% that would be in underlying funds? 

Long Term Assets will allocate to Investment Sub-Managers, as well as “inheriting” fund investments from ceding pension schemes. The Performance Fee will be charged once only.

In the case of inherited funds, fund interests will be acquired at a negotiated secondary price, where the fee drag typically associated with funds in the early years has already been factored into the net asset value at Take On, and where the underlying portfolio of assets is known and assessable.

What’s the management fee, 50 or 55 bps (both are quoted in the deck) and how much of that goes to the sub advisors?

The Investment Manager/Adviser fee at the vehicle level is 0.05% p.a.

A breakdown of the sub-manager fees is displayed below, generally at the 0.50% level. It is important to note that we have negotiated NAV-based fees and not fees on commitments.

Moreover, the bulk of the ‘fee’ is performance related, calculated on net returns only once performance goes above a hurdle rate of return of typically 8% p.a. achieved IRR.

OMERS ‘club’

Cost sharing fee, expected to be c 0.2% on NAV

Ardian (Private Equity & Infrastructure)

Inherited investments

Management Fee (“MF”) of 0.25% p.a. on Net Asset Value.

New Primaries

Up to £1bn of Commitments: MF of 0.50% p.a. on Net Asset Value with a floor of £300k p.a.

This fee will reduce by 0.05% p.a. on NAV for every additional £1bn invested, with a floor of 0.25% p.a. on NAV

Carried interest of 10%, paid in cash and calculated every three years, subject to a hurdle rate of 6% net IRR. Below that level the fee is 0.25% to 0.5%

Based on an investment of £1 billion i.e. before the fee reduction is effective, and forecast net return of 15%. This equates to an overall fee of around 1.4%.

New Secondaries

Standard MF and carried interest of the relevant Ardian secondaries funds.

Ardian will not charge any additional fees at Mandate level for commitments made to their own funds, which will charge their standard management fee and carried interest, subject to the applicable size discounts.

New Direct Investments

Co-investments alongside Ardian funds for LPs of those funds are generally not charged management fees nor carried interest.

Co-investments alongside third-party managers or in club arrangements will be charged a MF of 1% p.a. on NAV

Co-investments originated by Ardian will be charged 12.5% carried interest over a hurdle of 7% except for private equity, where the hurdle rate is 8% net IRR.

Based on an investment of £1 billion and forecast net return of 15%, this equates to an overall fee of around 0.88% p.a. for the direct investments’ allocation.

Disruptive Capital (Private Equity & Infrastructure Direct)

           MF of 0.50% per annum on NAV

Carried Interest of 12.5% over a 7% hurdle for infra, and, for private equity, the hurdle will be 8% net IRR.

Based on an investment of £1 billion and a scenario of a gross return of 16.4%. This equates to an overall fee of around 1.4%.

Let’s go through the discount control noted in the deck. How confident are you that this will not trading at a discount?

Liquidity is in the first instance provided by the London Stock Exchange listing. Scale will bring greater liquidity and with it greater interest in the stock.  With index inclusion and the like, then proxies such as 3i would suggest that the stock will trade at or above NAV.

Within Long Term Assets, there will be a discount control mechanism, underpinned by a semi-annual tender process whereby all Ordinary shareholders will be offered the chance to sell up to 25% of the shares in issue back to the company at 100% of NAV[1], subject to available liquidity.

This will be underpinned by the relationship with Ardian, one of the world’s biggest secondary private market investors, who could, if necessary, acquire a portfolio of fund assets from LTA to provide cash to LTA to meet redemptions

It will be further underpinned by a leverage facility with one of the biggest long term UK asset managers, who are prepared in principle to provide up to 25% of the gross asset value in cash.

While the exercise of tender offers is at the sole discretion of the Board, after the first year the Investment Manager expects that these will be made at every 6-month interval where the Company has significant cash surplus over and above that required for working capital, debt servicing, dividends, and commitment drawdowns and pipeline investments expected in the next 6 months.

As LTA reaches greater scale and so benefits from significant cash inflows from the placement programme and from portfolio realisations, so the Investment Manager expects the Board to make tender offers at every 6-month period.  Equally, at scale, the level of redemptions could be very large, so we have indicated a cap of £250m.

Failure to get to scale, itself a sub-set of the risks of PSF failing to get to scale, will exacerbate this issue.  Whilst LTA has a discount control mechanism, without a flow of new funds coming in it will eventually self-liquidate.  Without scale, it will not qualify for index inclusion and the liquidity that comes with it.  Nor will it achieve a high level of diversification and so be more vulnerable to individual portfolio movements.

How will you manage the conflicts with Ardian if asset owner assets are rejected?  Ardian will have visibility on the asset owner, its investments, and the fact the asset owner is keen to sell which could ultimately hurt pricing when it goes to sell in the secondary market.  

Ardian are acutely conscious of conflicts. That is one reason why we like dealing with Ardian, as opposed to some other managers. They are rigorous on compliance and legals.

For example, if there is an asset where they have been asked to bid on it in the secondary market. They would simply not to do it, nor mention why they couldn’t, because otherwise they would then be conflicted.

Ardian have spent over a year and a half on this process; and the number one issue for them is compliance and making sure that their reputation is pristine.

Liquidity – what is the funds’ liquidity policy?

On receiving any proceeds from the portfolio and the placement programme, funds sufficient to pay LTA’s semi-annual debt interest for the period will be placed in escrow, to be distributed to the lender(s) as and when such costs become payable.

To the extend such proceeds are insufficient for the period’s interest payments, the balance will be made up from LTA’s existing cash reserves.

Why such a high limit to listed equities especially if IPO’s of PE deals is not included in that cap?  Shouldn’t the management fee and performance fee should be excluded from that part of the portfolio?  I assume the listed element is for liquidity management?

We would charge 0.05% with no sub-management fees.

Whilst the limit is 30%, we should clarify this is excluding listed equity resulting from the IPO of a portfolio company.

The bulk of “inherited” public equities will be held in C shares. A number of pension funds have already approached us to offload their small cap holdings as well as private assets.

We will use quoted infrastructure equities for interim portfolio balance, pending completion on direct infrastructure investments.

LTA will acquire stakes at ‘appraised NAV’. How will this be determined? Is this the latest NAV reported by the manager or a NAV adjusted by Ardian that might include a discount?

Potential Direct Investments will be valued at ‘fair value’ by the Investment Manager (in conjunction with or based on advice from any Sub-Manager Appointees), using a methodology based on accounting guidelines and the nature, facts and circumstances of the respective investments.

The Investment Manager will in the first instance value Direct Investments in accordance with valuation techniques which are consistent with the BVCA’s International Private Equity and Venture Capital Valuation (“IPEV“) Guidelines, which we ourselves developed 25 years ago.

The valuation techniques set out in the IPEV Guidelines may be categorised as follows:

  • market approach, which may involve applying the following valuation techniques: (i) applying multiples of earnings or of revenue; (ii) using industry valuation benchmarks, including as a sense check of values produced using other techniques; and (iii) reviewing any available market prices;
  • income approach, which may involve applying the following valuation techniques: (i) discounted cash flows or earnings of underlying business; and (ii) discounted cash flows from an investment; and
  • replacement cost approach, which may involve applying the net assets valuation technique.

According to the IPEV Guidelines, the price of a recent investment, if resulting from an orderly transaction, generally represents ‘fair value’ as of the transaction date and may be an appropriate starting point for estimating ‘fair value’ at subsequent measurement dates. However, adequate consideration must be given to the facts and circumstances as at the subsequent measurement date, including changes in the market or performance of the Direct Investment.

Real estate assets to be held directly by the Company are independently valued using the RICS guidelines or the equivalent in the jurisdictions where they may be based.

Potential Fund Investments will typically be valued in a similar manner on a ‘sum of the parts’ basis.

The Investment Manager or a Sub-Manager (as applicable) may, at their discretion, query the valuation provided by the Relevant Manager or administrator of the Fund Investment and recommend an adjusted valuation where it does not believe that the valuation provided represents fair value. From time to time, the Investment Manager and/or the Board may appoint an independent valuation agent to determine a value where such an approach is considered appropriate.

If applicable, any publicly traded securities will be valued by reference to their bid price or last traded price, if applicable, on the relevant exchange.

If the Directors consider that it would be inappropriate to use a particular valuation technique, either generally or for a particular investment, the Company may adopt such other valuation techniques as they consider to be reasonable in the circumstances.

Accounts – can you please provide the accounts for the period from incorporation to 31 March 2021 and for the 9-month period ended 31 December 2022, even if unaudited?

This will be provided separately when produced

Research Team Structure – can you please provide some colour on the team at Disruptive Capital that is responsible for sourcing and managing assets?

The Disruptive Capital executive team responsible for sourcing and managing private market investments comprises:

Edi Truell

Cédriane de Boucaud

Henry Tilbury

Somil Lamba

Luke Webster

Roger le Tissier

Christine Whitehorne

Mark Hooton

Hammad Khan

Daniel Webb

Antony Barker

Jay Kenny

Andrew Stalker

Leshon Pitters

Chris Threadgold

The bios for the senior investment team can be found in the Prospectus.

In addition, the board and advisory board source deals from time to time; as does the Investment Manager’s network and affiliates in Pension SuperFund and the portfolio companies.

The Sub-Manager Appointees, such as Ardian, Gresham and HSBC, will be responsible for sourcing and managing new fund investments in, respectively Private Equity and Infrastructure; Sustainable Resources; and UK senior secured loans.

FX Risk Tolerances & Hedging Policy – can you please confirm how/if FX risk will be hedged?

We expect to hedge the majority of LTA’s non-sterling exposure via forward contracts.

Subject to portfolio level materiality, non-sterling assets with predictable cash flows e.g. debt, will be hedged to 100% and those assets whose cash flow were less predictable e.g. PE, will be substantively (70-100%) hedged at a level to be reviewed and confirmed by the investment committee.

Initially all FX hedging will be carried out via forward contracts. In due course the Investment Manager may look to put in place a multi-currency revolving credit facility, which could be used for currency hedging purposes and replace forward contracts in some positions; or by local currency debt at the investee company level.

[1] less transaction costs

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“Annuity or drawdown” – Playpen coffee with Billy Burrows

Posted on June 4, 2023 by henry tapper

Billy is an enthusiast for income in retirement and a hero for AgeWage as a result.

The Pension PlayPen will always have time for his views.

 

Register now to ensure you have the link to Billy’s session.

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