Pension investment: What does private equity look like?

In his Mansion House speech Hunt said the CEOs of many of the UK's largest DC pension schemes – viva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G & Mercer – had signed an agreement called the Mansion House Compact.

The Compact – which also involves the Lord Mayor - commits these fund, which represent around two-thirds of the UK’s entire DC workplace market, to the objective of allocating at least 5 per cent of their default funds to unlisted equities by 2030.

Hunt said: "If the rest of the UK’s DC market follows suit, this could unlock up to £50bn of investment into high growth companies by that time."

But what does private equity, or unlisted funds look like.

Maven Capital Partners said private equity investments expected to grow over the next few years included companies specialising in health tech, gaming and cybersecurity

Maven claimed the UK private equity market is expected to increase by six per cent, reaching about £3.4bn in value. 

Cybersecurity

One of the fastest-growing areas for private equity investors to look out for is cybersecurity.  

According to a government survey conducted in April 2023, 32 per cent of UK organisations have reported breaches or attacks in the last 12 months.

As virtual threats that keep companies’ systems hostage become more frequent, there is an increasing need for cybersecurity measures to ensure businesses are protected from dangerous cyber-attacks.

Luke Matthews, partner at Maven, said: ““From an investor’s point of view, the high demand for cybersecurity services worldwide means that there are a number of attractive investment opportunities in the field, building on the world leading expertise we have in this country.

“Capital from private equity investors can support the development of cutting-edge products and services to help keep businesses safe, while benefitting potentially from high returns.

“The cybersecurity sector is currently valued at around £139bn and is projected to grow over £340bn by 2030, so it is clear to see the value in this industry.” 

ESG and energy transition

Investing in ESG-related businesses, as well as in the energy transition sector, is a good way to make purpose and profit go hand-in-hand.

With a booming interest in sustainability efforts and practices, in recent years this area has developed significantly, offering lots of attractive opportunities for private equity investments.

In fact, there are huge environmental and social challenges that need to be addressed such as climate change and social inequality.

Energy transition technologies specifically are likely to need investments of roughly £105 trillion by 2050, and around 80 per cent of this figure is expected to come from the private sector.

By driving forward the adoption of renewable energy and greener gas infrastructure, private equity investors can play an important role in the positive outcome of energy transition worldwide. 

Health tech

The healthcare sector tends to be a reliable industry and is generally considered resilient to recession periods.

But as researchers work hard to bridge the gap between current and future healthcare needs, there is an affiliated, emerging sector that might appeal to investors – health tech.

Healthcare is undergoing a digital transformation, with several new technologies put in place to enhance patient care, improve operational efficiency, and minimise costs overall.

These include AI-driven platforms to help with diagnostics, wearable devices to track patients’ health on the go, telemedicine, and even remote patient monitoring.

This means that there are great opportunities for investors to capitalise on this growing sector. As well as potential investment returns, private equity investors can help bring to market the digital and tech solutions that are needed in the world of healthcare. This can elevate the quality of care on a global scale and help medical professionals look after their patients at the best of their abilities.

According to Statista, the digital healthcare market is forecast to reach over £530bn in value by 2025.

Gaming

As recent global events restricted people to their homes, the gaming industry witnessed a substantial growth in the last few years. This is thanks to an increase in gamer numbers globally, which is expected to rise to 3.3 billion by the end of 2024.

With the advancement of virtual reality, mobile platforms, and esports, this sector provides bundles of growth potential.

The exciting aspect about the gaming and software-development sector is that its market reach has no boundaries. Businesses in this industry can easily distribute their services and products to consumers all over the world, with incredible opportunities in terms of revenue potential.

In fact, they can generate revenue from several different sources, including game sales, in-app purchases, advertising, licensing, subscriptions, and even e-commerce.

Artificial Intelligence

AI software is another tech-related sphere that should be kept in mind. The beauty of AI software is that it can be applied to an extensive range of use cases and can facilitate the operations of several industries.

Ultimately, the versatility of AI software means that it can be adopted for things such as predictive analytics, natural language processing, and recommendation systems, paving the way towards a broad market with almost infinite investment opportunities.

Currently, the artificial intelligence market size is valued at about £406bn and is likely to rise vertiginously to £1.6 trillion by 2030.

Direct investment in unquoted or private companies carries a higher degree of risk than many other forms of investment and is only suitable for experienced investors who have both the capacity for risk and understanding of the high risk posed by private equity investment.

Lee Hollingworth, head of UK Retirement at Franklin Templeton, said: “We welcome the Chancellor’s measures to encourage workplace defined contribution schemes to invest in a broader range of assets. "Until now competition for market share – which has used cost as a proxy for value - has meant many schemes have been over reliant on passive equities and resulted in a lack of diversity in pension portfolios."

"Investing in alternative assets – such as private equity – will allow these schemes to access a wider variety of companies, especially as the number of listed companies is declining. Many firms are choosing to float much later or are often acquired before that point.

"We also welcome the launch of a government consultation to see if the Local Government Pension Scheme should increase to double its allocation to private equity to 10 per cent."

But we would also note that private assets, such as private equity, are not a magic bullet. Asset owners and managers still need to ensure any asset they allocate to provides the right risk-return profile for this investment goals and ensures the best outcomes for its members.”