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UK pension reform push depends on big bets

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The author is a fund manager former head of global asset allocation

The goals of pension reform outlined by UK Prime Minister Jeremy Hunt last week are lofty enough: to improve both productivity and pension savings.

of reform The firm is aiming to do so with a deal among a number of large financial services firms to allocate at least 5 percent of client assets in defined contribution default funds to unlisted stocks by 2030.

but his big idea It is based on some key assumptions. First, a lack of capital is preventing private high-growth companies from prospering. And second, private stocks offer higher returns than public market stocks.

The evidence for the first claim is circumstantial evidence. When it comes to venture capital, the UK is by no means a small fish. KPMG last year about $35 billion of deals were done in the UK, more than the deals completed in France and Germany combined. But for late-stage deals above $100 million, funding is dominated by international venture capital, New Financial’s analysis found. Capital is available in the global market for growth companies. It’s not particularly British. That said, it’s not hard to speculate that the cost of international due diligence is marginally increasing the cost of capital for UK growth companies.

Moreover, the UK appears to be having trouble scaling private companies. British Patient Capital — a subsidiary of the state-owned British Business Bank — report The deal sizes for US and UK startups are about the same for the first funding round, but for the fifth and sixth rounds, the US deal size will be about three times that of UK startups. It’s not clear if the problem is the availability of capital, but the lower cost of financing is not.

At first glance, the evidence that private equity is generating superior returns to public equity seems to rest on a more solid foundation. The overwhelming consensus from international investment managers’ capital markets assumptions is that private equity will be the most profitable asset class over the long term.For example, blackrock project Private equity outperforms U.S. equities by more than 3% a year over the long term.Morgan Stanley I hope 4.6% p.a. and JPMorgan Asset Management 2 percent.

The stated methodological basis for expecting outperformance in private equity is that the asset class has abysmal liquidity. You can’t get your money back when you want it. Forecasters predict that such impracticality must come at a cost, and they project this cost as a higher expected return. The illiquidity premium is easier to guess than to measure.

in the context of exceptional Given recent private equity performance, this may be forgivable. But if returns were flattering thanks to 15 years of low-yield bonds, then in a new era of higher bond yields, investment managers’ assumptions would prove to be mere guesses, not projections. Nevertheless, large investors such as Wellcome Trust surprisingly good returns For the last 10 years.

When measured over time, the returns of high-growth private equity strategies are more diverse.Even large, sophisticated investors like Calpers are seeing returns in VC portfolios average Less than 1% per year over 20 years.And, horrifyingly, academic research has found that largely universally Returns from private equity are no better than the public market, excluding fees. Said Business School Professor Ludwig Falippou called on the industry: billionaire factorybillionaires are fund managers, not entrepreneurs.

But a closer look reveals that government spending analysis Don’t rely on heroic earnings projections. In fact, they predict that defined contribution pension pots will be slightly smaller if they switch from public to private equity when fees are taken into account. Fees are high, and a 5% allocation to private equity is more than double the cumulative payout over a 30-year period, with a projected median of £10,700 to £22,500 per pension saver.

That forces Hunt to rely on a follow-up prediction that private equity firms will charge UK pension managers “only half the standard interest rate to meet his demands.”“Golden Rule” To ensure the best possible outcome for pension savers.

The prime minister’s willingness to help solve two thorny problems: the difficulty of companies scaling up from start-up to public listing, and the low rate of return of defined contribution pensions in the future should be commended. is. If he can bring private equity fees down to levels where the asset class outperforms the public market even in a higher-yield environment, he could achieve a third.

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The author is a fund manager former head of global asset allocationThe goals of pension reform outlined by UK Prime Minister Jeremy Hunt last week are lofty enough: to improve both productivity and pension savings.of reform The firm is aiming to do so with a deal among a number of large financial services firms to allocate at least 5 percent of client assets in defined contribution default funds to unlisted stocks by 2030. but his big idea It is based on some key assumptions. First, a lack of capital is preventing private high-growth companies from prospering. And second, private stocks offer higher returns than public market stocks.The evidence for the first claim is circumstantial evidence. When it comes to venture capital, the UK is by no means a small fish. KPMG last year about $35 billion of deals were done in the UK, more than the deals completed in France and Germany combined. But for late-stage deals above $100 million, funding is dominated by international venture capital, New Financial’s analysis found. Capital is available in the global market for growth companies. It’s not particularly British. That said, it’s not hard to speculate that the cost of international due diligence is marginally increasing the cost of capital for UK growth companies.Moreover, the UK appears to be having trouble scaling private companies. British Patient Capital — a subsidiary of the state-owned British Business Bank — report The deal sizes for US and UK startups are about the same for the first funding round, but for the fifth and sixth rounds, the US deal size will be about three times that of UK startups. It’s not clear if the problem is the availability of capital, but the lower cost of financing is not.At first glance, the evidence that private equity is generating superior returns to public equity seems to rest on a more solid foundation. The overwhelming consensus from international investment managers’ capital markets assumptions is that private equity will be the most profitable asset class over the long term.For example, blackrock project Private equity outperforms U.S. equities by more than 3% a year over the long term.Morgan Stanley I hope 4.6% p.a. and JPMorgan Asset Management 2 percent.The stated methodological basis for expecting outperformance in private equity is that the asset class has abysmal liquidity. You can’t get your money back when you want it. Forecasters predict that such impracticality must come at a cost, and they project this cost as a higher expected return. The illiquidity premium is easier to guess than to measure.

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in the context of exceptional Given recent private equity performance, this may be forgivable. But if returns were flattering thanks to 15 years of low-yield bonds, then in a new era of higher bond yields, investment managers’ assumptions would prove to be mere guesses, not projections. Nevertheless, large investors such as Wellcome Trust surprisingly good returns For the last 10 years.When measured over time, the returns of high-growth private equity strategies are more diverse.Even large, sophisticated investors like Calpers are seeing returns in VC portfolios average Less than 1% per year over 20 years.And, horrifyingly, academic research has found that largely universally Returns from private equity are no better than the public market, excluding fees. Said Business School Professor Ludwig Falippou called on the industry: billionaire factorybillionaires are fund managers, not entrepreneurs.

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But a closer look reveals that government spending analysis Don’t rely on heroic earnings projections. In fact, they predict that defined contribution pension pots will be slightly smaller if they switch from public to private equity when fees are taken into account. Fees are high, and a 5% allocation to private equity is more than double the cumulative payout over a 30-year period, with a projected median of £10,700 to £22,500 per pension saver.That forces Hunt to rely on a follow-up prediction that private equity firms will charge UK pension managers “only half the standard interest rate to meet his demands.””Golden Rule” To ensure the best possible outcome for pension savers. The prime minister’s willingness to help solve two thorny problems: the difficulty of companies scaling up from start-up to public listing, and the low rate of return of defined contribution pensions in the future should be commended. is. If he can bring private equity fees down to levels where the asset class outperforms the public market even in a higher-yield environment, he could achieve a third.
https://www.ft.com/content/ed4d0611-4d2c-405d-98cb-b71352f0d2f5 UK pension reform push depends on big bets

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