Private Equity Firms Embracing Investments in Defined Benefit Schemes
UK private equity firms are increasingly considering investing in businesses with a defined benefit (DB) pension scheme, according to research from Cardano. The improved funding position of DB schemes, some of which have even moved into surplus, has caught the attention of over two-fifths (43%) of private equity firms in the UK. Additionally, another fifth (20%) of firms are currently factoring the favorable DB funding landscape into their investment strategies.
It’s notable that private equity firms are now more open to working with DB schemes, seeing them as less of an obstacle to investment decisions compared to before 2022 when interest rates were at historic lows. The research also indicates that being able to access a scheme’s surplus, either at any time or when the scheme is wound up, would make a business an attractive investment target for 67% of private equity firms.
Furthermore, the broader investment opportunities offered by well-funded DB schemes are seen as crucial by 63% of firms. These opportunities make businesses with DB schemes more transactable and desirable for investment. And when assessing DB schemes, 61% of firms also consider the lower risk of regulatory intervention an important factor.
However, for schemes that are in deficit, almost three quarters (74%) of private equity firms lack knowledge about solutions to de-risk and create value for investors in the long term. This lack of awareness of options like buy-ins and buyouts could lead firms to overlook attractive businesses with a DB scheme in a deficit position.
Cardano’s managing director, Nick Gibson, mentioned that private equity firms are increasingly eyeing pension scheme surpluses as a source of untapped capital. This shift demonstrates a departure from the historically cautious approach to mergers and acquisitions involving DB schemes. Overall, Gibson noted that understanding the dynamics of DB pensions could create new value in a highly competitive private equity market.
