The co-founder of private equity firm Disruptive Capital, Edi Truell, a key figure behind the UK’s public pension consolidation, announced the formation of ‘The Pension SuperFund’ in March, which promises to do the same for private schemes.
Led by Alan Rubenstein, former chief executive of the UK Pension Protection Fund, the SuperFund will consolidate private defined benefit pensions into a pool that its founders expect to grow to at least £20 billion ($27.6 billion; €22.8 billion). It is supported by investors such as Warburg Pincus and underpinned by an initial £500 million of capital.
The new entity should benefit from the cost savings enjoyed by its public equivalents. Consolidation should mean fewer investment managers, fewer sets of fees, lower administration costs and less need for accountants, auditors and other auxiliary functions.
“The best way of doing it is to absolutely push the pension funds together,” Truell says. “You have six or seven super funds, which are big enough to afford a proper asset and liability management team at the centre, like the Canadian model or the Dutch… That’s what we’ve done with the pension super fund to show the way.”
Truell also believes that larger funds will have the ability to attract better people, which in turn means more sophisticated, better investing. This presents an opportunity for private equity.
A level playing field for GPs and trustees
With the SuperFund, Truell wants to avoid what he sees as a common flaw with many public sector funds: the relatively low pay of investment professionals, which deters the best people. In his view, this is partly to blame for the lukewarm relationship between most UK public pensions and the private equity industry.
Private equity firms have on occasion, he admits, been guilty of trying to blind pensions’ eyes with science. In April, Sarah Smart, chairwoman of TPT Retirement Solutions, which manages £9 billion ($12.4 billion; €10.2 billion) of UK pension assets, bemoaned a lack of transparency from general partners when it comes to fees and said that private equity was at risk of running a “fad cycle”. Truell believes that a lack of sophistication on the part of trustees is equally problematic.
He cites his time as chair of the London Pension Fund Authority as an exception that proves the rule. The pension features trustees such as current Gresham House chief executive Tony Dalwood and former Bank of America managing director Dermot ‘Skip’ McMullan – an unusually experienced group that was able to overhaul the fund’s private markets offering to positive effect.
On starting at the LPFA in 2012, Truell found 29 separate private equity funds of funds with an average allocation of £12 million, he says. The fund also had a cleantech portfolio: about 40 holdings, mostly funds of funds, with very small commitments to each one. “We reckon that it cost up to 10 percent a year in total costs for management fees, performance fees and all the rest of it,” he says.
The board moved to a private equity investment strategy based on direct investments and co-investments. It tapped Schroder Adveq to run a programme of co-investments, picked a handful of primary managers and upped the size of its commitments, then made secondaries allocations to “get money in the ground quickly”. The pension made around 20 co-investments during Truell’s time there. After three years it was making a 40 percent internal rate of return.
“You have to be lucky to get a bunch of experienced people pro bono,” he says. “You’ve got to be prepared to pay proper money to attract the talent to take on private asset managers on equal terms. Look at something like Wellcome Trust, which offers proper salaries and bonuses. They’ve got great teams and get great results.”
Now the SuperFund is up and running, the next step is winning private pension funds around to the benefits of a pooled future. The success or otherwise of Truell’s project is likely to shape the future of UK pension funds and their relationship with private equity.