Around this time last year we attempted to get to the bottom of media reports that UK defined benefit pension schemes were dumping private markets holdings to free up cash due to the gilt crisis.
At the time, Secondaries Investor had not seen any credible evidence that British pensions were doing so, with secondaries intermediaries and consultants to pension funds saying they had not seen any DB pensions come to market with illiquid holdings due to the impact of the UK’s mini-budget. We still have not seen any evidence of such pension schemes offloading private markets assets under fire-sale like conditions.
However, one year on and it appears UK DB pension schemes have, to some extent, been selling private markets holdings, though due to different drivers. Importantly, this has not been for urgent liquidity reasons; it has been as a result of expediting the process of moving their liabilities to insurance companies as they move to buyout – a process in which the pension fund moves from sitting with a corporate entity to an insurance company.
“There were a few larger sales over the last 12 months, but it has not been a tsunami,” says Bernhard Engelien, head of Greenhill’s European secondary capital advisory business. The bank is receiving regular enquiries from consultants to UK pensions whose clients are considering private markets fund stake sales ahead of a buyout by an insurance company, Engelien adds.
In most cases, these are smaller programmes with relatively low alternatives allocations, Engelien caveats.
Higher interest rates mean UK pension funds are much better funded than they were before the liability driven investment crisis because they look at long-dated government bond yields, Paul Kitson, head of pensions consulting at EY, tells Secondaries Investor. This means that UK pension plans find themselves in the position of wanting to move to buyout sooner than expected and therefore need liquidity.
Insurers – driven by UK regulations that define the types of assets that a life insurance company can invest in – are quite particular about the assets they want to hold, Kitson says.
“Pension funds are in this world where effectively, to achieve the buyout, they potentially need to take a haircut on those illiquid assets in order to liquidate them,” he adds.
UK pensions wanting to shed illiquid assets are having to stomach discounts of around 5 percent for asset classes that are illiquid yet tradeable, Kitson says. The fact that most DB pensions hold their assets in pooled funds provided by asset managers means they’re not held directly and are therefore trickier to exit, he adds.
With the UK’s DB pension scheme sector holding around £1.5 trillion ($1.83 trillion; €1.72 trillion) in assets, there is clearly dealflow to be taken advantage of for savvy secondaries buyers – just not necessarily at fire sale prices.
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