Pension shortfall deters one-third of UK VCs

One-third of UK mid-market private equity investors canvassed in a new survey said they would not invest in a company with a pensions deficit from a defined benefit scheme.

A new survey conducted by Grant Thornton Corporate Finance found that one-third of UK mid-market investors would not back a company with a defined benefit pension deficit. Despite this, every investor surveyed said they had backed at least one business with such a deficit over the last 12 months.

The survey canvassed 100 mid-market VCs targeting deals worth between £5 million and £200 million. Of these, almost half (48) said none of their portfolio companies was currently exposed to a “significant” pensions deficit. Of the remainder, 37 said ten percent or less of their portfolio had a liability, while 15 said more than ten percent had a deficit. Two of the VC firms canvassed said 70 percent of their portfolios had deficits.

The fact that some investors are shying away from firms with pension deficits appears to reflect the greater publicity the issue has received. The implementation of accounting standard FRS 17 – which set out the accounting guidelines for retirement benefits – focused UK companies on the need for greater balance sheet transparency in relation to the status of defined pension schemes.

The survey says such transparency “brings the pensions issue to the forefront of investors’ minds and reinforces the risk factors involved when investing in a company with a pensions shortfall”.

However, the survey added that the willingness of many investors to continue backing companies with pension shortfalls “proves that occupational pensions deficits are not a barrier to investment all the time”. This is particularly the case where the deficit is only small, and also reflects the relatively short-term investment horizon of most private equity investors.

“If the deficit is significant, VCs are more likely to give way to trade buyers who generally take a much more long-term view when making their investments,” said Mat Bhagrath, partner at Grant Thornton Corporate Finance.