UK’s largest private sector pension scheme, BT pension fund, is investing £1 billion in private equity. The fund has provided the task of investing the money to Hermes GPE. The firm has announced it will look to find private equity investments that aren’t expensive or traditional large buyouts.
BT’s Private Equity Plan
The fund announced its plan on Monday. Hermes, which is a specialist investor in the global private equity industry, will oversee the investment of £1 billion. The total amount is going to be invested during the next three years.
According to the official statement, the investment will be evenly divided amongst funds and co-investments and the aim is to invest in global private equity assets.
The latest agreement isn’t the first time BT’s pension scheme has allocated money for Hermes to invest in private equity. The two ran a similar scheme in 2011, with the current mandate replacing this previous mandate.
Peter Gale, head of private equity and CIO of Hermes GPE, commented the deal by saying, “We are delighted that BTPS continue to put their trust in us and our investment models. As one of the first private equity specialists to move away from the funds-only model, we have long been an innovator in the space and have a proven track record to match.”
The decision to allocate half of the money in co-investments shows the strength of this new type of investment in the industry. The industry is moving increasingly away from traditional buyout houses dominating the scene to having investors invest independently from these firms.
Simon Moss, partner at Hermes GPE, said the new mandate would allow the investment specialist to highlight “the potential our co-investment model has to enhance investment returns via faster, targeted deployment of capital and more control over strategy and portfolio construction”.
As market valuations have been on the increase, traditional buyouts are much more difficult in terms of fund’s investor profits. Therefore, new strategies have been taking shape and investors are becoming increasingly meticulous about the way they want their investment money allocated.
Mr Gale told the Financial Times, “We think the risk-reward has shifted from that more vanilla investment to the niches of private equity”.
The Fund’s Performance
According to BT’s latest report from 2014, the annual investment return stood at 6.2% for the twelve months to 30 June 2014. This would provide a rate of 5.8% per annum in the previous three years.
The scheme had 3.2% of funds allocated in private equity, which was just slightly higher than during the previous year. Hermes manages around half of BT pension scheme’s assets.
On the other hand, Hermes has currently around £4 billion assets under management. According to the firm, its co-investment track record has realised returns of 1.8 times and 31.3% IRR. Its most recent private equity fund managed to raise $480 million.
It closed last September and has already committed to around 28 transactions, with over 80% of the funds already allocated. The firm hopes to fully commit the remaining equity by the end of the year.