Pension funds could safely invest another £25bn in private equity, claims Mercury

British pensions funds could safely invest as much as £25bn more than they currently do in private equity, provided they are prepared to take a long-term view.

British pensions funds could safely invest as much as £25bn more than they currently do in private equity, provided they are prepared to take a long-term view.

A report by Mercury Asset Management, a leading private equity investor, claims that pension funds drastically overestimate the riskiness of private equity compared with more traditional equity investments such as quoted shares.

The report, by Peter Stan-yer, head of the strategic asset management team, and Peter Lockyer, head of risk management, aims to add to the debate triggered by Tony Blair, who last year called on fund managers to invest more cash in venture capital projects.

Tomorrow Paul Myners, the Gartmore chief picked by Gordon Brown to investigate whether the City is doing enough to fund enterprise, is due to announce the inquiry's terms of reference.

The authors of the report conclude that most pension funds could easily set aside 5 per cent of their funds for private equity investment, substantially more than the 3 per cent the bigger funds typically invest. Estimates suggest that across the UK pensions industry, investment in private equity accounts for just 0.5 per cent of the £550bn of funds allocated for equity investment. In America the figures are much higher.

Mr Stanyer said: "What we are trying to say is that it is not half as volatile as often assumed. The main risk factor is that you have to commit yourself to investing long term, which means at least 10 years."

The problem, he said, is that many funds have long draw-down times. Money raised now is often not invested for two or three years, and even after that, it may be 10 years before the company is ready to be floated or sold on.

Many pension funds have been put off by bad experiences, or reports of them, over specific investments. However, there are now many private equity funds that offer a sufficiently wide diversity of investments to ensure that risk is evenly spread.

The issue was one of the main topics for discussion at last week's meeting of the National Association of Pension Funds in Glasgow. A paper presented by Ken Ayres, a consultant with Frank Russel, the actuaries, warned that the Government was itself contributing to pensions funds' reluctance to invest in private equity because such investments are not recognised as assets that can count against the minimum funding requirement.

When these rules combine with the lack of liquidity inherent in private equity investments, in some circumstances employers may have to increase pensions contributions.