Merging LGPS schemes could lead to loss of focus on place-based investing, said the British Private Equity & Venture Capital Association’s Tom Taylor.
The UK government’s plans to merge UK local government pension schemes (LGPS) might undermine support for smaller, local venture capital investments, Tom Taylor, head of policy at the British Private Equity & Venture Capital Association (BVCA) has said.
Speaking at the UK Sustainable Investment and Finance Association (UKSIF) spring conference in Edinburgh last week, Taylor stressed the potential challenge of keeping a local investment focus despite the LGPS pools merging, adding that any consolidation runs the risk of investors opting for large-scale projects over investing locally.
“The problem is that if you consolidate and get bigger, that could lead to a temptation to just put large tickets to work in large infrastructure projects, which would be a shame for smaller venture capital and growth equity funds that operate in the UK,” said Taylor.
His comments come as seventeen of the largest workplace pension providers agreed to unlock £50bn in investment for the UK economy by allocating more to private markets as part of the new Mansion House Accord. The providers have committed to invest at least 10% of their defined contribution (DC) default funds in private markets by 2030, with at least 5% of this being invested in the UK, which, if achieved, would secure a notional £20bn of investment in local communities.
The landmark agreement follows last year’s first Mansion House speech by the UK chancellor of the exchequer Rachel Reeves. At the annual speech to the City of London, where traditionally the chancellor will outline the UK’s financial and economic policies and aims, Reeves announced plans to merge LGPS assets and consolidate DC schemes into “megafunds” to unlock £80bn (€94bn) of investment for infrastructure projects and businesses of the future.
However, a key challenge is that if the merged larger schemes do not reinvest in their own investment teams and simply focus on economies of scale, there could be a tendency to allocate mainly in big projects or large global buyouts, which could undermine smaller local ventures, stressed Taylor.
Private capital
Currently, UK pension schemes invest very little in private capital compared to overseas schemes, with only about 2%-3% of capital coming from UK schemes versus 30%-40% from overseas, said Taylor.
Overall, the Mansion House push into private markets is progressing with increased engagement resulting in early investment vehicles evolving, according to Taylor.
Furthermore, private capital is increasingly viewed as being compatible with sustainability goals due to private capital firms often taking active ownership, allowing them to influence portfolio companies directly, Taylor added.
Looking ahead
Addressing concerns about liquidity and risk hindering DC scheme investments, Taylor said that while liquidity management remains important, the steady inflow of contributions into DC schemes suggests that liquidity can be managed at the scheme level, making private capital investments more feasible.
“It’s going to take some time, but there’s so much policy work and engagement between the DC and private capital world going on in the background that we are starting to see real progress in terms of capital commitments starting to be made,” Taylor added.
