UK pensions allocate 40% more to private equity

British pension funds continued to diversify in 2008 investing 40% more in private equity and 30% more in hedge funds than in 2007. Real estate fared less well, however, with mandates dropping to levels last seen in 2003.

UK pension funds increased their private equity allocations by 40 percent in 2008 compared to 2007, according to research by investment consultancy Watson Wyatt. 

The 40 percent increase in private equity allocation was due to larger funds implementing their diversification strategies directly rather than via funds of funds, the research found. As a result of this there were more direct allocations to private equity funds than funds of funds allocations in 2008.

The research also found that real estate allocations by pensions plummeted in 2008, with the asset class receiving only one quarter of the mandates that had been awarded a year earlier.

“While real estate has evolved considerably in a relatively short period of time, 2008 did not represent good time for allocations in this area,” Craig Baker, global head of manager research at Watson Wyatt, said in a statement.

Hedge fund investment by UK pensions went up by 30 percent year-on-year in 2008, but hedge funds of funds did less well, with their mandate percentage dropping from 44 percent in 2007 to 35 percent in 2008.

“Diversification using alternatives is commonplace, but it comes at a price with large demands on governance budgets and high fees,” Paul Trickett, European head of investment consulting at Watson Wyatt, said in a statement. He said that more pension funds are realigning their fee structures and raising their game by adding to governance or moving to lower cost solutions.

The research was conducted by UK-based Watson Wyatt Investment Consulting, which serves a client base of more than 500 funds with assets worth over $1 trillion, according to its website.