对DWP关于促进生产性金融投资的咨询的回应

Iain Clacher and Con Keating January 2022 Introduction This consultation comes just a few months afterthemodification of the charge capandis a proposalto exempt certain classes of illiquid1private investments from the DC charge cap.“Specifically, thegovernmentproposesadding to the list of charges currently out of the scope of the charge cap toincludewell-designedperformance feesthat are paid when an asset manager exceeds pre-determinedperformance targets.”The title of this consultation is misleadingto the extent thatit is concernedsolely with illiquid securities and the DC charge cap. Far more investment inproductive finance andcapital lies outside that limited range of instruments, and it is worth emphasising this at the start asthe scope of the consultation is extremely narrow.We have in this response considered theinvestment merits of illiquid securities and their potential use in DC pension arrangements but haveomitted, as being out of scope, several other importantpublicpolicy aspects, such as consideration ofthe tax cost of these partnership arrangements and the economicconsequencesof materialincreasesin the indebtedness of the corporate sector.We would also note that the BIS2has recently begun workonsome public policy aspects of private markets, such as procyclicality and monetary policytransmissionsensitivityall of which are clearlyrelevant to this issue. To provide context,we commence with a brief discussion of the Ministerial Foreword to theconsultation. We share the Minister’s ambition“…toensure optimal outcomes for the nation’s definedcontribution (DC) saver” but do not believe that the proposed changes would or shouldcontribute toachieving that. The foreword states: “The trustees ofDCschemes are increasingly looking to privatemarkets to deliver on this responsibility due to the benefits of diversification and greater returns.”,which we do not believe is unconditionally true, andexcept fora small number of high-profilelargerschemes, there is little evidence presented thus far that there issignificantpent-up demand by thetrustees of DC schemes for these types of investments. It seems to us that the exhortationsandinducementsof the Prime Minister and Chancellor in their open‘challenge’ letter3have been thedriver of this interest. We(Keating)wrote and published an article in response to that challenge,reproducedas Appendix A. In the course of our responses to the specific consultation questions, wewill challengesome of the general statements made about these asset classes that are taken as accepted wisdom e.g.,the idea that these investmentsare truly long-term innature,offer anymaterially better diversification or greater returns than conventional listed investments. The foreword asserts: “Investment in asset classes like green infrastructure, private equity,andventure capital, fits well with the long-term horizons of DC schemes.”.It is true that the illiquidinvestments, typically limited partnership interests,that investors are required to make arecontractuallylong-term in nature, typicallyhaving a lifetime often or fifteenyears, but this does notmean that the investments madebythese partnerships are long-term–andit isthat,of course, whichmust ultimately be reflected in the performance of these partnership funds. According to Pitchbook4,the average term of investments held by private equity firms is now 4.5 years,up from 2.2 years in 2006. In 2016, the most recent year reported by Pitchbook, 31.2% of companiesexiting buy-out funds had been held less than five years, down from 50.9% in 2003.With distributionsto investors currently at 28.8% of net asset valueannually, funds have a life,or term,to return theinitial investment of just 3.47 years. Note that both traditional listed equity and corporate bonds havelives far in excess of this term.With the FTSE dividend yield at 3.2%,listed equity has a 31-year term,which share buybacks would bring down to around 27 years. The investor in a private equity fund does not know when or for how long the funds committed willbe drawn. Figure1 shows the most recent levels of undrawn capital,theso-called “dry powder”currently sitting but undeployed in PE. Note that there is uncalled but committed capital dating back as far as 2013. Moreover, thistotalislarge by comparison with calls on committed capital as is indicated in Figure 2.This stock representsalmost four yearsofsupply based on the highest level of contributions(investments)made (~£70billion) in recent times; at the lowest rate ithas beenover seven years’ supplyand is equivalent toover four years of new fund raising. The distribution amountsarising from the realisation of investments made are also highly variablefrom year to year. For the US private equity market, they have varied from as little as 5% of the netasset value of funds to over 45%. This is the source of much confusion as to achieved rates of return. The internal rateof return (IRR) isbased upon the funds deployed over the periodto th