Third of GPs will not invest in firms with pension deficits reveals Grant Thornton

04 February 2005

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A third of mid-market private equity houses will not invest in a company with a pensions deficit from a defined benefit scheme, according to a survey conducted by Grant Thornton Corporate Finance. Whilst every firm surveyed indicated they had completed at least one deal involving a company with a pensions liability over the past twelve months, over 80% of respondents said this was not the case in the majority of their new investments. Looking at the results in greater detail, investment houses' exposure to pension liabilities appears to be relatively under control. Asked what proportion of their portfolio was exposed to significant pensions deficits, almost half (48%) claimed to have no deficits whilst 37% admitted to having pensions liabilities within a tenth or less of their portfolio. The remaining 15% declared significant deficits within a higher proportion of their investments - the highest being 70% (of their whole portfolios) for 2% of the institutions surveyed. The underperformance of the stock market over recent years and improving mortality rates are two of the principal catalysts, which have triggered defined pensions deficits. The implementation of FRS 17 in November 2001 brought into focus the necessity for balance sheet transparency in relation to the status of defined pension schemes. Although this accounting standard will not necessarily have had a direct effect on the type or number of investments that private equity houses make, it certainly brings the pensions issue to the forefront of investors' minds and reinforces the risk factors involved when investing in a company with a pensions shortfall.