Profiting from Britain’s pensions shake-up

Last year, defined contribution pension schemes signed up to the government’s Mansion House Accord, agreeing to invest at least 10% of assets in private markets by 2030, with half of that earmarked for UK opportunities.

Now, the recently passed Pension Schemes Act has widened the range of investments pension funds can use to meet those targets. Crucially, it allows pension schemes to gain exposure to qualifying assets through listed investment vehicles, including investment companies and the funds that invest in them.

In simple terms: pension managers that previously shunned investing in UK property and infrastructure have now voluntarily agreed it is time to do so and that could have important consequences for ordinary investors.

The government estimates these reforms could unlock £50bn of investment into infrastructure and renewables with at least £25bn ultimately directed into the UK economy by 2030.

The initial assumption was that this money would flow into private equity, venture capital and specialist private market funds. But there is another possibility sitting in plain sight.

The London stock market already hosts a large number of listed investment companies that own exactly the assets policymakers want pension funds to back.

Infrastructure investment companies own transport networks, electricity grids, fibre infrastructure, battery storage and renewable energy assets. REITs hold warehouses, healthcare property, rental housing and logistics portfolios.

In other words, many of the assets pension funds are now being encouraged to buy are already available on the stock market today. What’s more, many of these companies are yielding high single and sometimes low double-digit income having spent years trading at discounts that increasingly look difficult to justify.

If institutional money begins flowing back into these vehicles, investors could benefit from a market rerating that has been years in the making.

Why investment companies may suddenly become more attractive

One of the more interesting quirks of these reforms is that listed investment companies may actually offer pension funds a more efficient route into these assets than some of the structures originally proposed by policymakers.

Previously, pension schemes were expected to access private assets primarily through Long-Term Asset Funds (LTAFs). But these structures typically need to hold around 15% of assets in cash to meet liquidity requirements, creating what fund managers call “cash drag”, with capital sitting idle rather than generating returns.

Listed investment companies do not face the same issue. In fact, with some listed infrastructure companies currently trading at discounts of around 25% to net asset value, every £1 invested potentially gives access to substantially more underlying assets.

If those underlying assets are generating yields of around 8% annually, the economics begin to look even more compelling.

If this all sounds theoretical, it is worth noting that overseas investors have been recognising the value in UK-listed infrastructure and property assets for some time.

Blackstone has spent years accumulating UK logistics and warehouse assets. KKR attempted to acquire Assura and its portfolio of GP surgeries and private hospitals. US-based CareTrust REIT recently acquired UK-listed Care REIT to gain exposure to British care homes.

The pattern is hard to ignore. International capital has already recognised that UK-listed real assets are trading at attractive valuations relative to the quality of the assets underneath. The question now is whether UK pension funds are finally about to follow.

Why now?

The most interesting development for private investors in the UK may be what happens once institutional money starts arriving.

A generation ago, UK pension funds were major owners of domestic equities. Today, their presence in large parts of the UK market is minimal. If pension funds begin allocating capital into listed infrastructure and real estate vehicles, trading volumes could rise, discounts may narrow and valuations could begin reflecting the true worth of the underlying assets.

Private investors already invested in these sectors, or those considering exposure, may find themselves well positioned in one of the market’s more overlooked recovery stories.

No information contained in this article should be construed as providing financial, investment or other professional advice and should not be considered as a recommendation, invitation, or inducement to subscribe for, dispose of or purchase any such securities. Capital at risk. Past performance is not a guide to future performance.