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AlternativesNovember 25, 2020

Private Equity Fundraising Down But Not Out, Despite Pandemic

Deal-making is bouncing back after being shut down earlier in the year due to the COVID-19 outbreak.

Despite being down 19% from last year’s record levels due to disruptions caused by the coronavirus pandemic, private equity fundraising “remains robust” at $524 billion through the first three quarters of the year, and is in line with previous years, according to a report from Ernst & Young.

The number of funds was also down, dropping 28% from last year to 754. However, buyout dry powder continued to grow during the third quarter to $853 billion. More than half of the dry powder was in mega funds, which gives them ammunition to pursue large-sized deals. And distressed funds have access to $140 billion of undeployed capital, which is 15% higher than at the beginning of the year.

Private equity investments fell by 12% in value and 30% in volume year-to-date compared with the same time period last year, as private equity firms invested $353 billion for the first three quarters of 2020 compared with $401 billion in the first three quarters of last year.

“The year began strongly and fell flat from mid-March 2020 until April 2020 as a result of the COVID-19 pandemic and the preventive measures taken to limit its spread,” according to the report. “With lockdowns being lifted and international travel resuming gradually, activity is beginning to bounce back.”

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Ernst & Young also noted a significant shift in deal-making based on geographical region, as deal activity in the Americas fell 44% during the first three quarters of the year compared with the same time last year. At the same time, the number of deals more than doubled in the Asia–Pacific region, while deal-making was flat in Europe, the Middle East, and Africa.

The report cited a recent survey from S&P Global that found respondents were seeing a sharper rise in deal activity for Asia–Pacific-focused investors than investors focused on other regions. According to the survey, 27% of all respondents see steady or increasing deal activity; however, more than 40% of Asia–Pacific-focused private equity investors said they saw activity rising thanks to a recovery in China and eastern Asia. However, less than 30% of the respondents focused on North America and Europe said they expect activity to increase or remain flat in the coming months.

Private equity exits fell 17% during the first three quarters of 2020, compared with the first three quarters of 2019, which the report largely blamed on the shutdown of markets, difficulty in due diligence, and concerns related to pricing. Private equity exit activity fell to $281 billion, while volume was down 31% to 662 deals. All regions saw exit activity falling, with the Asia–Pacific region seeing the sharpest decline at 59%, while exit activity in the Americas and Europe, the Middle East, and Africa were down 11% and 10%, respectively.

The report also cited an Eaton Partners survey that indicates limited partnerships have been largely unaffected by liquidity issues despite speculation to the contrary at the beginning of the pandemic.

The survey also found that limited partnership’s private capital asset allocation strategies remain unchanged, as more than one-third of respondents reported re-upping allocations to alternatives with incumbent managers. Additionally, two-thirds of limited partnerships said they were willing to make commitments without physical meetings, while a majority of limited partnerships said they believe the worst of the COVID-19 impact has passed.

UK High Court Equalization Ruling to Burden Pension Trustees

Legal experts expect court decision will add ‘significant difficulties’ for defined benefit trustees and could take years to complete.

By Michael Katz

Last week, the UK’s High Court extended a 2018 ruling on guaranteed minimum pensions (GMP) to include former pension plan members who had transferred their GMP benefits to other pension plans after May 1990. According to pension and legal experts, the ruling will burden many pension trustees with significant difficulties and the effort could take years to complete.

Guaranteed minimum pensions were introduced in 1978 and allowed employers that offered defined benefit (DB) plans to contract out their staff and pay a reduced rate of National Insurance Contributions. In exchange for the lower rates, the companies promised that their pension would meet a minimum standard of benefits.

However, in the following years, there were complaints that guaranteed minimum pensions were inherently discriminatory because men and women accrued them at different rates, and were entitled to them at different ages—60 for women and 65 for men. In 2018, the High Court ruled that different “guaranteed minimum pensions” payments to men and women were illegal, which led to trustees being instructed to equalize benefits at a cost of an estimated £10 billion to £20 billion ($13.4 billion to $26.7 billion).

Because the High Court’s most recent ruling extended the 2018 ruling to include former plan members who had transferred their GMP benefits to other pension plans after May 1990, they will now be entitled to have their payments recalculated. That means members who exercised their right to transfer their benefits will be able to have a top-up payment made from their former pension plan added to the plan where they transferred their benefits. And there could be as many as 1 million people who need their benefits checked as a result.

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According to Willis Towers Watson, the top-up payment is the shortfall between the original transfer payment and what would have been paid if benefits had been equalized at the time, with interest in line with the bank base rate plus 1% each year.

Willis Towers Watson warns that the new ruling will cause significant difficulties for many trustees. The firm said the data may no longer exist for some plans, and, in many other cases, the cost of checking and tracking down members could be more than the amount of benefits being topped up.

Willis Towers Watson also said there could be practical problems in making a top-up payment, such as if the receiving plan no longer exists, or is unwilling to accept the transfer, or if the member no longer has benefits in the plan. The firm said that in these cases, trustees will need to agree with the member on how to compensate them for the original shortfall.

The court ruling “isn’t a surprise, but it will add to the burden for pension scheme trustees who already have plenty to keep them busy,” Alasdair Mayes, a partner at actuarial consultancy firm Lane Clark & Peacock, said in a statement. “The immediate action is for sponsors of pension schemes to assess whether the impact is material for their upcoming year-end accounts,” he said, adding that “this complex process will take months if not years.”

Mayes also said that based on the equalizations the firm has already completed, top-ups will in many cases be small, but for a few people it will mean thousands of pounds added to their pension.