Private markets have traditionally been the domain of institutional investors due to their illiquid nature and higher risk profiles, but recent initiatives in the UK aim to broaden access to these markets, particularly for pension funds, to enhance returns and stimulate economic growth.
Introduced in July 2023, the Mansion House Compact is a voluntary agreement among several of the UK’s largest defined contribution (DC) pension providers, committing them to allocate at least 5% of their default funds to unlisted equities by 2030 – potentially unlocking up to £50 billion for investment in high-growth companies.
As of twelve months ago, the 11 signatories of the Compact, including firms like Aegon, Aviva, and Scottish Widows, held approximately £793 million in unlisted equity assets within their DC default funds, representing about 0.36% of their total DC assets. While this is a modest beginning, it signifies a foundational step toward the 5% target.
Signatories have since initiated several measures to increase investment in private markets, including expanding or reallocating staff to work on unlisted equity investments and introducing evergreen funds, such as Long-Term Asset Funds (LTAFs), designed to accommodate the liquidity and valuation challenges of private assets.
Despite the progress, challenges persist. Operational and technical barriers, such as performance fee structures and regulatory constraints like permitted links rules, complicate the integration of private assets into DC schemes.
In addition, adjustments to regulations now allow certain performance fees to be excluded from the DC charge cap, enabling schemes to pursue investments with performance-based fee structures without breaching cost limits.
In addition, a predominant focus on cost over value among trustees and consultants can impede the adoption of higher-fee private market investments, even when they offer potential for superior returns. Nevertheless, adjustments to regulations now allow certain performance fees to be excluded from the DC charge cap, enabling schemes to pursue investments with performance-based fee structures without breaching cost limits.
Meanwhile, the Private Intermittent Securities and Capital Exchange System (Pisces) announced by the Chancellor in November, is designed to support growing companies by enabling secondary trading in the shares of both public and private firms. Legislation to establish the system is not expected until the summer,
Both the Mansion House Compact and Pisces represent significant steps in the UK’s strategy to enhance its financial services sector’s growth and competitiveness. By encouraging greater investment in unlisted equities through pension fund consolidation and providing innovative platforms for private company share trading, these initiatives aim to drive economic growth, support business expansion, and deliver better financial outcomes for investors and savers alike.
This column was first published in the January/February 2025 print issue of Funds Europe magazine.
