GP commitments: are pension pots a viable option?

The requirement from investors that general partners have some skin in the game in the funds they manage is a perfectly reasonable one. But with such large sums at stake, younger private equity professionals often don't have sufficient liquid assets available to meet their share of this co-investment requirement, unlike their older colleagues who are more likely to be able to fund this from their own savings or balance sheets. Even with leverage of up to 50% from banks, funding the rest from their own pockets is a prospect that many find challenging. Unlocking their pension pots could provide a solution.

Younger PE professionals who have worked across different corporate roles as they have built experience and developed their CVs in the early part of their careers may have several pension pots from different employers. These could now be consolidated into one self invested personal pension (SIPP), following which the consolidated funds and new tax deductible pension contributions could be used as a tax-efficient source of co-investment funds. It's an appealing option. However, to make it work, there are several issues and potential pitfalls to bear in mind.

Firstly, linking a large proportion of your wealth to your employer, or to illiquid private equity investments, requires careful consideration, as any investment professional knows. Individuals will want to weigh up how this might impact the diversification of their portfolio and whether they are comfortable with heavy weightings towards this asset class.

The current lifetime allowance cap of £1m in the value of assets that can be held tax-free in a pension could potentially prove problematic – especially if a fund performs extremely well" – Nauman Gondal, Apollo Private Wealth

Secondly, scheme trustees will need to be happy with this approach. They will want to scrutinise the suitability of the investments, particularly from the point of view of liquidity, and the due diligence process could be lengthy. They will want to know that they can readily sell the investments if they need to wind up the scheme and return benefits to beneficiaries should the scheme-holder die.

Thirdly and finally, the current lifetime allowance cap of £1m in the value of assets that can be held tax-free in a pension could potentially prove problematic – especially if a fund performs extremely well. Breaching this ceiling could result in a "lifetime allowance charge" of up to 55%. Hardly surprising that this is a key area on which we find clients often require expert advice. To avoid a costly tax bill, it's vital to make informed investment decisions based on accurate forecasts of fund performance and taking into account how much time is left before retirement.

Using pensions as a vehicle to meet co-investment requirements is an area rich with opportunity but also fraught with hazards for the unwary. Deploying pension capital can be a good way to facilitate co-investment – and boost the value of the pension pot in the process. But it's an approach that requires careful forward planning and strategic, expert wealth management advice, as well as on-going monitoring to ensure that the benefits to retirement savings outweigh the risks.

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