UK- The flight of UK pension funds from equities into bonds has dashed hopes that funds would increase their investment in private equity, according to a senior pension fund consultant.
Nick Fitzpatrick, head of global investment consulting at Bacon and Woodrow and a former investment manager of the British Rail pension funds, said that UK pension funds see private equity as “trouble” and are staying well clear of it.
Fitzpatrick told delegates at a private equity conference in London this week that pension fund managers were moving out of equities into bonds to provide a better match for their liabilities. He said he expected funds to move 50% of their portfolio into bonds within a short period.
This would leave no room for private equity, he said. “In no way is private equity any match for liabilities. It damages a fund’s flexibilty. It does not provide reassurance to members. It’s trouble - and pension fund trustees have got enough of that on their plates already.
“Trustees are exhausted and they don’t wish to add to their burden by moving into a new asset class and a new set of managers, which is what they would have to do if they invested in private equity.”
Fitzpatrick said that in spite of lobbying by government and the UK and European venture capital associations, UK pension funds had shown little interest in private equity so far. He pointed out that the percentage of WM All Funds invested in venture capital had remained unchanged over the past five years at 0.8%. He said he expected no further uptake for the next 12 months. “There may be a place for private equity in pension funds but it won’t be just yet,” he said.
He said that volatile equity markets and new accounting rules had forced UK pension funds to ask themselves the question “why are we making money at all?” If they decided they did need to make money they would not return to active equity fund managers, he predicted. “They are fed up with the silly and complacent way their portfolios have been managed over the past few years.”
In the medium to long term, this could mean that pension funds showed more interest in private equity. “Pension funds are looking for diversification, and this is something that private equity can provide,” he said.