Are recently proposed policies likely to work?
The Mansion House agreement was an initiative when Jeremy Hunt was chancellor. It has elements that might suit the new government’s needs.
The companies that were behind the Mansion House agreements have now created the Canary Wharf Group. The head of Legal & General, Nigel Wilson, has made a number of proposals, such as the removal of stamp duty, though his call for a UK Isa seems to have been dropped.
He correctly notes that the scale of the government’s plans probably exceeds what the DB pension schemes could provide.
The figure of £85bn by rebalancing DB schemes over the next few years compares with £20bn a year budgets for environmental investments (which is almost certainly too low an estimate), a further £8bn a year for water, around £20bn a year for the housebuilding plans and a similar amount, hopefully, for investment in technology, bioscience and future growth industries.
The group suggests that this financing should be done through an allocation to private equity.
There seem to be a number of questions here.
Firstly, these groups generally charge much higher in-house fees on allocations to private equity funds than on allocations to UK gilts.
As these closed DB schemes are managed at the discretion of the same firms, who is going to check that the beneficiaries’ interests are being looked after?
Do these firms actually have private equity skills that can match the independent firms in this area – such as Blackstone and Macquarie – with whom they will be competing?
Also, if the local authority pension schemes increase their allocation to this area, do they have the skills, and what would happen if (maybe when) some of the investments go wrong?
How does this affect UK equities?
Even if a private equity vehicle is UK incorporated, it might well invest outside the UK so that seems difficult to enforce. Similarly, investing in Airtel Africa might be a UK investment in one way (it is FTSE listed), but its businesses are not in the UK.
But why ask for an increased allocation only to private equity? Why is the group not suggesting they aim to buy more UK equities overall – including listed UK mid-caps and growth companies?
It seems an odd omission from the public statements, especially given concerns regarding the falling number of listings on the UK stock exchange and the perceived lack of support from large UK investors for new UK listings.
The UK is unique in having a structure through which infrastructure investments can be listed.
The investment trust sector has a range of funds investing in just the wind farms, battery storage facilities (to decarbonise the grid), and even railways. The largest of these, managed by investment company 3i, has more than £7bn of assets, so is established, proven and scalable.
