Exploring alternatives

Pension funds in the UK are shifting away from equities, but have yet to settle on private equity.

Pension funds in the UK are continuing to rebalance their portfolios away from public equities in favour of non-traditional asset classes, according to research conducted by consultancy Mercer. A rush to private equity, however, is apparently not on the cards.

In the last 12 months the average exposure to traditional equities among UK pensions has fallen to 50 percent from 54 percent, continuing a trend from previous years. Over the same time period, investment in non-traditional asset classes is continuing an upward trend. UK pension average allocations have risen to 9 percent from 6 percent.

Of the 750 UK pension schemes that participated in the survey, only around 5 percent had a strategic allocation to private equity, either via primary funds or fund of funds managers.

What we found anecdotally is that schemes that didn’t have an allocation are effectively waiting.

Crispin Lace

While this seems like a small proportion of pensions to tap the asset class, it “stacks up quite well against other non-traditional asset classes such as hedge fund of funds [to which around 9 percent of UK schemes had allocations] and global tactical asset allocation [to which around 8 percent],” says Crispin Lace, a senior investment consultant at Mercer.

The 5 percent of schemes which do have a private equity allocation allocate on average between 5 percent and 6 percent to the asset class.

However, only a small number – around 3 percent – of the schemes surveyed said they wanted to increase their allocation to private equity in 2010. This number covers those already with an allocation and those who would be starting from scratch.

“What we found anecdotally is that schemes that didn’t have an allocation are effectively waiting,” said Lace. “They are finding some compelling arguments for private equity – and in particular either distressed or secondary private equity strategies – but they are just waiting a little bit longer to see how the market develops.”

“Those that already have an allocation to private equity tend to be comfortable with the allocation they have,” he adds.

“We started discussing [the increasingly attractive private equity opportunity] with clients in the middle of last year, but I think it was a little early for most people. Most people were still dealing with the fallout from equity market falls and were more concerned about risk mitigation than pursuing what felt like a reasonably high risk opportunity.”

This is likely to change as the recovery becomes firmer, concludes Mace, as the perceived opportunity to for GPs to pick up attractive assets at “relatively attractive valuations” will continue for some time.