UK pension funds acquire real estate at significant discounts

Some of the UK’s largest pension plans are capitalising on significant price discounts to acquire real estate and other private assets, as fellow retirement funds offload their harder-to-sell holdings. Pension Protection Fund (PPF), the UK’s £32bn retirement scheme lifeboat, and Border to Coast Pensions Partnership, a £60bn local authority pool, are among those seeking bargains in the secondary market. For instance, the PPF purchased part of a property fund at a 35 percent discount to net assets from another pension fund this year. “We were offered that discount; we didn’t try and drive the price down,” said chief investment officer Barry Kenneth, noting that the seller had offered the discount to all shareholders in the fund. The PPF has allocated up to £350mn for property investments, including funds available on the secondary market. “We are progressing with a couple of managers to take advantage of market dislocations and/or depressed prices,” Kenneth added.

Portfolios of private assets are being offloaded by defined benefit pension schemes as they prepare for buyouts by insurance companies, which typically refuse to accept illiquid assets. The rush to prepare for such deals, which reached a record £50bn in bulk annuity deals last year, has led to steep discounts on some assets, particularly real estate funds, private debt, and private equity portfolios, according to investment advisers. Christian Dobson, alternatives portfolio manager at Border to Coast, stated, “We have been most active in private equity secondaries given the larger opportunity set but continue to consider opportunities across the private credit and infrastructure spaces.” He noted that buying private asset funds, rather than investing directly, had helped diversify his portfolio. High-quality assets managed by strong performers may trade at small discounts to par, while “venture capital and growth equity funds continue to trade at substantial discounts to par, representing greater uncertainty around valuations and future liquidity,” said Dobson.

Most sellers are corporate schemes preparing for buyouts, while larger public sector players, often with ample cash and new members, are the primary buyers. “The bigger funds are more nimble and can act quickly,” said Chris Roberts, managing director at Dalriada Trustees, a professional trustees firm.

Katie Sims, head of alternative solutions at consultancy WTW, mentioned that a few big opportunistic buyers are bidding for some assets at discounts of 30 to 40 percent. However, interest from pension scheme buyers is helping to narrow some of the previously available price markdowns. James Lewis, chief investment officer at consultancy Mercer, noted that the mismatch between buyers and sellers is decreasing, with some UK property funds now trading at net asset value or even a small premium in some cases. “We’re seeing that discounts are starting to narrow as values fall, public valuations recover, and competition among buyers increases,” said WTW’s Sims.

Source: Financial Times