Private equity firms are increasingly considering investing in businesses that have a defined benefit fund, thanks to improved funding positions and access to pension plan surpluses.
A survey of 102 U.K.-based private equity firms by Cardano, a Marsh McLennan subsidiary, found that firms see pension funds as less of a block when it comes to deciding whether to invest vs. the period before 2022, when interest rates were at historic lows.
Rising interest rates by central banks to combat high inflation had the effect of reducing pension fund liabilities, due to the way those liabilities are calculated. Pension funds covered by the London-based Pension Protection Fund’s 7800 index recorded an aggregate £235.5 billion ($299.3 billion) surplus as of Nov. 30, compared with a surplus of £81.4 billion as of Nov. 30, 2021. The Bank of England started hiking interest rates in December 2021. Over that same period, liabilities have fallen by 48%.
More than two-fifths (43%) of firms have factored the favorable DB funding situation into their investment strategies, the survey showed, while an additional 20% are in the process of doing so.
Cardano also said 67% of private equity firms surveyed said being able to access a surplus would make a business an attractive investment target.
Regarding businesses where pension funds are running a deficit, 74% of private equity firms said they either had no knowledge of or were unsure of the solutions that plans could use to derisk and create value for investors in the long term.
"Private equity firms are increasingly eying pension scheme surpluses as an attractive source of untapped capital,” said Nick Gibson, managing director at Cardano, in a news release related to the survey. “This is certainly a shift from the historically cautious approach to M&A activity involving DB schemes, reflecting improved funding levels that bring lower regulatory risk and lower risk of deal value leakage.”
Amid a highly competitive private equity market, and in the hunt for new opportunities, “investors that understand the DB pension dynamics have a new opportunity to create value that was previously not available to them,” Gibson added.
