The UK government is pinning its hopes on private market capital kickstarting the stuttering economy and helping deliver on key goals including net zero and infrastructure upgrades. And it wants pension funds to play a pivotal role by funnelling capital into unlisted, illiquid investments. So is this a calculated gamble that will pay dividends or is the government playing roulette with people’s retirement savings?

As private markets continue to evolve from niche to near-mainstream, they are reconfiguring the investment landscape and presenting investors with new opportunities and new risks. The rise of private markets has been rapid and shows no signs of slowing down, with global assets under management currently standing at about $12 trillion[1]. And PitchBook’s base case projections suggest private market AUM could soar to $20 trillion by 2028.[2]

CoreData has been tracking the growing institutional appetite for private assets through research partnerships with asset managers. A recent Aviva study, for example, found 73% of global institutional investors expect private market investments to outperform their public counterparts over the next five years. And a 2024 Schroders report showed nearly all pension funds were either already investing in private markets or planning to do so in the near future.

Private markets hold appeal for institutional investors seeking superior risk-adjusted returns, diversification and exposure to megatrends including decarbonisation and digitalisation. Furthermore, investors have access to an expanding set of opportunities in the private sphere as companies opt against going public, delay IPOs or delist in a phenomenon dubbed “de-equitisation”.

On the back of these strong tailwinds, private assets have been given a further boost by the UK Labour government. Chancellor Rachel Reeves sees pension fund private investments as key to unlocking growth, fuelling the energy transition and “levelling up” regional disparities.

This is part of a broader government strategy looking to create mega pension funds with the scale to invest in large infrastructure projects. And it follows other initiatives, including the 2023 Mansion House Compact which asked defined contribution (DC) pension providers to allocate at least 5% of their default funds to unlisted equities by 2030.

So, can pension funds help revive the country’s ailing economy and solve real world challenges such as climate change and a shortage of social housing? We spoke to some UK industry experts to get the lowdown.

A “win-win” scenario?

The chair of the investment committee at an occupational pension scheme says it “absolutely makes sense” for the government to encourage pension funds to invest more in private markets.

“You only have to look around the country to see the UK needs more investment. The country’s been under-invested in for arguably decades, so I think there’s unquestionably a need for pension funds to be looking at this,” he says.

A portfolio manager at a public sector pension fund thinks the government’s private markets drive could steer the country to a “win-win” position.

“I’m optimistic and would encourage the government to push ahead with the agenda because there’s so many opportunities that don’t get funding that could also improve the portfolio mix of pension schemes,” he says.

But the chief investment officer of a public pension plan says he is unclear what problem the government is trying to solve given the country already “punches way above its weight” in the private markets arena.

“We are probably the most privatised market in the world,” he says. “Take infrastructure, where the water sector is held almost entirely by private markets, with the exception of two or three publicly listed companies. And the same applies to gas, electricity, water, railways, the list just goes on and on.”

UK asset pipeline will be key

But the jury is out on whether pension funds can help the government meet its ambitious goals through private investments into UK assets.

“It’s wishful thinking that pension schemes are going to come up with all the investment the country needs, not least because people like me are always going to think about diversification,” says the chair of the investment committee at an occupational scheme. “Pension funds are going to be a bit edgy about having too many eggs in the UK basket and particularly around assets that might have political risk.”

The CIO of the public pension plan thinks it boils down to the quality of projects.

“If you come up with well-structured products, clear regulations and clear contracting frameworks then private capital will come,” he says. “But if you expect private capital to underpin badly structured projects or take on risk investors are uncomfortable with, such as nuclear, then no amount of pressurising is going to help.”

The portfolio manager at a public sector pension fund says real progress can be made in areas such as net zero and the energy transition if there is coherent government policy.

“As long as there is a strong government push and a clear agenda in what the government wants to achieve, then this will shift the focus and the capital will eventually flow,” he says. “But you need a critical mass as well as conviction and consistent policy by the government.”

A moral responsibility on sustainability?

There is also the question of whether it’s the responsibility of pension funds to provide solutions for the country’s social and environmental challenges.

The CIO of the public pension plan thinks generating returns for members should take precedence.

“The first responsibility of pension funds and trustees is to ensure pensioners are paid because that’s their legal, fiduciary responsibility,” he says. “We have been longstanding investors in renewables but we never invested in renewables just because that was solving the world’s climate problem. That was undoubtedly a good thing, but the most important thing was the risk-adjusted returns were credible.”

However, the chair of the investment committee at an occupational scheme thinks pension funds have a moral responsibility to prioritise sustainability.

“The energy transition is a massive subject. Should we have responsibility for that? I think we should. It’s all very well saying our job is to achieve the best pension outcomes we can for members, but those pensions have got to be payable in a world that’s worth living in,” he says.

Need for expertise

So, will investing in private markets in line with government strategy generate strong returns for scheme members or is it a risky undertaking that could inflict investment losses?

The CIO of the public pension plan says it depends on whether pension schemes are well-resourced and have the necessary levels of private market expertise.

“The real danger is if you approach this in a very light touch way and don’t understand these markets,” he says. “You will then end up with an illiquid portfolio with return outcomes not that different to the public markets and all you’ve done is pay lots of fees.”

The chair of the investment committee at an occupational scheme also sounds a note of caution.

“My main concern is about complexity and illiquidity issues which trustees need to think carefully about. So I think there’s a risk that some pension schemes might get hurt.”

Time will tell if the government’s private markets push proves to be a political blunder or economic wonder. Pension funds can undoubtedly play a bigger role in supporting UK innovation and financing national infrastructure projects, but they will need to be supported by a consistent industrial policy. And this must be balanced against the need to provide a sustainable future for pensioners.

Will Roberts is a senior editor at CoreData Group, a global specialist financial services research and strategy consultancy. To find out more about our industry insights and research programmes, you can reach him at [email protected]

[1] Private markets policy briefing, The Investment Association, March 2024

[2] Toward $20 trillion in private capital AUM, PitchBook, May 2024