UK government pension schemes have taken on an increasing role in backing private equity with their appetite for risk growing in the past few years.
The average allocation of UK pensions to “other” investments – a category that includes private equity and real assets – was 27 percent in 2020, compared with 19 percent in 2015, according to Mercer’s European Asset Allocation Insights 2020.
The £19.8 billion ($27 billion; €23 billion) Local Pensions Partnership, a collaboration between the Lancashire County Council and London Pensions Fund Authority, has 12 percent of its total AUM in private equity, according to PEI data. The Local Pensions Partnership Investments, its in-house investment business, managed a PE portfolio worth £1.38 billion as of 31 December. It invests across buyout, growth, special situations and distressed and has backed funds managed by Hermes GPE and Montana Capital Partners, PEI data show.
For the £9 billion Lancashire County Pension Fund, private equity was the “standout contributor” for the pension with returns in excess of 25 percent, according to its 2019-20 annual report. Within the portfolio, it has reduced its exposure to large buyout funds as valuations and leverage are currently at high levels, LCPF noted in the report.
The £6 billion LPFA, meanwhile, invests roughly 10 percent of its assets in private equity across primaries, secondaries and co-investments. Close to three-quarters of its PE portfolio is allocated to buyouts and the rest in growth equity and venture, according to its website.
“There’s been a desire among UK public pensions to allocate more capital to private equity,” said a managing partner of a London-based placement firm. UK government pensions still have room to grow, the managing partner added.
“There’s been a lot of messaging to that effect, but we haven’t yet seen a meaningful shift in the way local pension authorities invest because they haven’t been as fluid with cash as they would’ve liked to be.”
A notable development among UK pensions is the move by defined contribution schemes to get involved with private equity in a more meaningful way, according to the chief investment officer of a global investment firm.
“Time and time again, private markets have proved to be invaluable to investors’ long-term outcomes, whether it’s increased returns, accessing opportunities not accessible in public markets or more inflation sensitivity,” said the CIO.
Here are the most active UK government pensions schemes in PE, according to PEI data.