The Myners Review of Institutional Investment

26 March 2001

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March saw the publication of Paul Mynersâ€™ Review of Institutional Investment for HM Treasury, which includes, amongst its recommendations, measures to help increase pension fund investment in private equity funds.

According to the report, UK pension funds make up only 8% of total investments in UK private equity vehicles, while their US counterparts account for 23% of investment in American vehicles. In addition, US private equity receives only 6% of investment from foreign sources, while overseas pension funds make up 29% of the UK total. Although the relative size of US funds is larger, the report suggests that these figures demonstrate an unusual reluctance amongst UK pension fund trustees to consider private equity as a viable asset class.

The report attributes this reluctance to several factors specific to the UK. The first is that UK fund trusteesâ€™ relative lack of expertise in the field of private equity has discouraged them from investing in an asset class commonly regarded as â€˜riskyâ€™. To remedy the situation, the report recommends that the BVCA continue its efforts to increase awareness of the mechanisms of private equity and the returns that the asset class can generate. However, commentators emphasise that responsibility for education does not lie solely with the BVCA; Tom Ross, Chairman of Penta Capital highlights the fact that companies investing in pension funds can play an important educational role, given their experience of setting up new ventures.

Furthermore, Marek Gumienny, Managing Director of Candover, points out that trustees could take greater advantage of professional gatekeepers to help them with the selection of investee funds and the monitoring of their portfolios.

Another concern addressed by the report is the lack of standardisation and independent auditing shown by private equity houses. Although EVCA announced pan-European guidelines for reporting on returns at its recent Spring business seminar, they are just that â€“ guidelines â€“ and the report calls for the setting-up of an independent auditing body to ensure that private equity houses comply with these guidelines.

The report also suggests a number of regulatory changes to put UK pension funds on an equal footing with foreign investors. It has been recommended that the Minimum Funding Requirement, which was established following the Robert Maxwell pension fund scandal, be abolished, thus increasing the freedom of fund trustees to invest in higher-risk asset-classes. It is also recommended that fund trustees investing in private equity should no longer require authorisation under the Financial Services Act, the cost and legal uncertainty of which have discouraged trustees from private equity investment in the past. The 1907 Limited Partnership Act, which restricts the number of members in a partnership to 20, has also been earmarked for change; although a larger number of investors can find structures to get around the law, it presents unnecessary administrative costs.

The overall consensus is that the report is a good first step, and that it is now up to the BVCA, pension fund trustees and the UK government to implement its recommendations. It is also accepted that the rate of change will be slow; indeed, one commentator suggested a five-year time scale for the cultural changes aspired to by the report.