The private capital argument is that the UK is vastly out of kilter with the rest of the world when it comes to pension fund investment, in that a large majority of private equity funds in the UK are capitalised with foreign pension fund money.
The problem for the private equity managers is that in the main they are closed-ended funds via a limited partnership.
Lora Froud, a partner at Macfarlanes and adviser on LTAFs, says: "Investors are locked up for 10 years if not longer before they can get their money back, and these will be the sort of vehicles that private capital mangers use. The problem is that these types of vehicles are not sufficiently liquid to be permitted links. There has to be some liquidity there."
Under section 21.3.1of Cobs, permitted unlisted securities are mentioned as a permitted link, but this is only if they are "realisable in the short term". Private equity by its nature is long term and somewhat unpredictable – a private equity manager will invest in a business, and sell it on when ready to do so.
The private capital sector tends to point to a few UK DC funds that are not unit-linked, one of which is already using private equity funds: Nest is an active user, and People's Partnership will likely soon be. Nest's view is that it has so many inflows, and at £36.8bn it has the flexibility, to be able to withstand any liquidity issues with PE.
Dan Mikulskis, chief investment officer at People’s Partnership, provider of The People’s Pension, says: “While the scheme doesn’t currently invest in private markets, it has reached the scale where the trustees can now seriously consider how they invest in them effectively.
"Investing in such assets has always been dependent on schemes such as The People’s Pension reaching scale.
"The business is currently building a team of specialists that will enable it to overcome some of the barriers that are typically faced with accessing private markets in a way that maximises value for members."
Ultimately, it may be that new schemes evolve that use a blend of structures.
Froud says: "Some of the new master trusts being set up are trying to set themselves up right at the beginning with some of the business being done through life wrappers and some being done outside life wrappers. That may require quite a lot of the service providers, but if that's going to start to be the model you don't worry about permitted links."
