Pension funds have only five months to get to grips with venture capital before the Treasury makes i...
Pension funds have only five months to get to grips with venture capital before the Treasury makes it a central issue for trustees, according to Edmund Truell, chairman of the British Venture Capital Association (BVCA) relations committee.
Speaking at the NAPF autumn conference in London in November, Truell said 7.3% of pension fund assets are allocated to private equity in the US while the figure is between a quarter and a third that amount in the UK.
This difference in investment proportions has been a central argument to the Treasury's investigation into furthering the amount of investment from pension funds in UK, but Truell pointed out the UK private equity industry is the second largest market after the US and accounts for half of European venture capital investment.
He said: "A record £7.8bn was invested in 1999, in more than 1,300 companies, of which £6.1bn was invested in the UK." More than £1bn of this private equity was invested in UK high tech companies and more than £1bn of new funds was raised for future investments in high tech companies in the same year, Truell said.
He added pension funds could invest in private equity through limited partnerships, a dedicated fund, quoted investment trusts or direct investment into unquoted companies.
Direct investment is the most risky of the options and Truell said he would recommend a limited partnership to diversify risk.
Truell said UK private equity has outperformed the UK FTSE indices over three, five and 10 years. It also outperformed the WM Pension Fund Universe by a greater margin, according to the BVCA.
"We have received most of our investment from US pension funds and insurers with an increasing trend from Europe," he added.
Barriers to the increased use of private equity include the current minimum funding requirement (MFR), which results in trustees taking a short, three-year view towards their investments as opposed to the 10-year view generally recommended for private equity, he said.
FSA regulation, reporting burdens and a lack of knowledge around private equity have also contributed to its slow take-up.
Truell said he wanted to see Paul Myners' recommendations on MFR put into legislation and added the Government was sending out confused signals over the future funding of pension schemes.
He said: "On the one hand the Government says 'Why can't you all invest more into private equity?' But then they penalise you with an instrument like the MFR."
High fees have been another historic barrier but Truell said superior net returns should justify charges, which can be as much as four or five times those paid on quoted equities.
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