UK Pension Agency Boosts Alternatives as Private Equity Fell Sharply in '09

(March 11, 2010) — The Pension Protection Fund (PPF) said recently it would increase its exposure to alternative assets, such as hedge fund-style products and private equity.

In contrast, a study by the European Private Equity and Venture Capital Association shows pension funds deceased their commitments to private equity by 94% in 2009. Towers Watson, for example, conducted 70% fewer manager searches on their clients’ behalf than in 2008, Financial News reported.

The PPF’s decision comes as an anomaly as UK pension schemes are shifting toward less risky assets by moving out of equities, selling shares, and buying risk-free bonds.

The PPF, which has decreased its strategic allocation to listed equities to 10%, plans on mitigating its liabilities through interest rate swaps, while still maintaining its investment of about 65% of its portfolio in cash and bonds, Reuters reported. “Even though we are investing in private equity and infrastructure we are doing so in a very controlled fashion and we will continue with our hedging program that served us very well through the crisis,” McKinlay told Reuters.

The PPF, set up in 2005 with assets under management currently at $6 billion, earned a total return of 13.4% in 2009.

Recent news from Preqin shows sovereign wealth funds have a similar approach to private equity, with around one in two SWFs diversifying by investing in private equity, real estate and infrastructure assets. According to the research, 55% of the funds invest in private equity, 51% in real estate, and 47% in infrastructure, with more than a third in hedge funds.