UK government set to unveil new pensions investment vehicle

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The UK government is set to soon unveil plans for a new investment vehicle overseen by the state that is intended to turbocharge pensions funds’ investments in high-growth private companies.

Chancellor Jeremy Hunt is expected to announce the vehicle in his Autumn Statement next month, people familiar with the matter said, delivering on one of the promises of the Mansion House initiative he launched earlier this year.

In a July speech, Hunt said the state-owned British Business Bank would assess how government could play a “greater role” in helping pension funds to invest in domestic assets to encourage economic growth.

After months of discussions with pension funds, the BBB is now developing plans for an investment vehicle where pension funds can co-invest in high-growth companies under the guidance of the bank, two of the people said.

The BBB has also offered to give pension funds access to some of its older investments so they can have cash flows from their portfolio from the first year without selling assets at a discount, one of the people said.

High-growth companies can take many years to return cash to investors in their earlier funding rounds. Investors can sell out early but such sales in illiquid secondary markets can involve offering discounts to attract buyers.

The BBB will also offer pension funds access to its in-house expertise. The bank advanced £12.4bn to more than 90,000 smaller businesses last year and has a swath of investments in early-stage companies, including through venture capital funds it backs.

“The chancellor wants to crack on with it,” one government official said. They added the objective was to “protect” pension funds while also encouraging them to invest more in private assets.

The level of the bank’s financial participation is still being worked out, as is governance of the vehicle. The BBB declined to comment.

“Any innovation that supports opportunities in productive investment is something we support,” said Callum Stewart of Standard Life, which held discussions with the bank over the summer.

“One of the areas the BBB could potentially have a role in supporting is around alleviating concerns with liquidity,” Stewart added, describing the ease of trading in and out of positions as “one of the key concerns for pension funds investing in the growth agenda”.

Private assets are harder to value and sell than investments such as listed shares and government bonds. Fears are also growing about unrealistically high valuations for some private assets as interest rates rise.

The Financial Conduct Authority, the UK’s top financial regulator, is carrying out a sweeping review of valuations governance across the sector, the FT reported last month.

“Pension funds are looking for good-quality UK investments at low cost,” said Nigel Peaple, policy spokesperson with the Pensions and Lifetime Savings Association, the industry trade body speaking for pension funds with £1.3tn under management.

“Where the BBB can play a role is their specialist knowledge of the UK growth companies combined with the ability to invest in complex private markets at low cost. If this can be achieved through co-investment at low cost, we would support this.”

Additional reporting by George Parker