The relative underinvestment in private equity of UK pension funds and life insurance companies will be a key focus of a review of institutional investment, launched yesterday with the release of a consultation paper by its chair, Gartmore executive Paul Myners.
The consultation paper sets out almost fifty issues for discussion and encourages responses from all sections of the investment community.
The review, announced in the government's May budget statement, is expected to take a tough line with institutional fund managers, accused by critics of showing a “herd mentality” when making investments and ignoring the excellent returns offered by private equity.
Mr Myners asks in the paper: “We have a large pool of long-term capital but do we invest it with a sufficiently long-term view?”
The consultation paper contrasts the cautious investment patterns of UK institutional investors with the more adventurous approach across the Atlantic. It says: “UK pension funds typically invest about 0.5% of their assets in venture capital, where their US equivalents invest nearer ten times this portion – around 5%. UK life insurance companies invest comparably small proportions of their portfolios in venture capital.”
More recent figures from the British Venture Capital Association shows the proportion allocated by pension funds may actually decline further before the report is delivered to the Chancellor in May 2001. BVCA's annual report on investment activity for 1999 shows that for the third year running there was a decrease in the amount invested in private equity by UK pension funds. Insurance companies increased their allocation by 300% last year, but still invest less than pension funds overall.
Mr Myners says he will focus on factors that might be “distorting” rational decision-making by institutional investors, including government regulation and the lack of experience of many pension fund trustees.
The consultation document is available electronically at www.hm-treasury.gov.uk.