Pensions

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  • shirley_basso
    shirley_basso Posts: 6,195
    edited August 2023
    A VC or PE deal isn't a complex structured financial product which can't be understood.

    In any case, in the course of this discussion, the gov't papers are focussing on investing in smaller businesses, where the role of the investor is more cookie cutter (professionalise, invest in key hires, grow) vs proper mid-market, where it's all about finding efficiencies, lots of leverage, split up, hiring consultants etc. TBH the large end is not a space I know well.

    Institutional fundraise isn't doing well this year due to interest rate rises as investors have other places to put their money and the challenging outlook - large investors raised a shedload during COVID and now struggling to deploy, particularly when deploying large swathes of capital into businesses (vs property / infra etc.), again, due to the outlook. Lots of dry powder to deploy, but as they always say - never waste a good recession! You are right on VC in that the rules do sometimes encourage poor investment decisions.

    As for your final point - noone will ever know.
  • shirley_basso
    shirley_basso Posts: 6,195

    pangolin said:

    My default aviva pension is 20% bonds despite being ~30 years from retirement. This feels overly cautious.

    Might have been a few years ago; read a research note by Morgan Stanley last month put out a note that suggests that, volatility aside, returns in equities will be roughly around the same as bonds over the next few years.

    You never really know obviously.
    Seems a bit to pull research from a few years ago given where we are today, no?
  • rick_chasey
    rick_chasey Posts: 72,517

    pangolin said:

    My default aviva pension is 20% bonds despite being ~30 years from retirement. This feels overly cautious.

    Might have been a few years ago; read a research note by Morgan Stanley last month put out a note that suggests that, volatility aside, returns in equities will be roughly around the same as bonds over the next few years.

    You never really know obviously.
    Seems a bit to pull research from a few years ago given where we are today, no?
    No i mean return on equities outperforming fixed income would have made more sense a few years ago.

    Argument is valuations are still mega high so the return are lower and more volatile in a inflationary environment and rates are high.
  • TheBigBean
    TheBigBean Posts: 20,551

    A VC or PE deal isn't a complex structured financial product which can't be understood.

    In any case, in the course of this discussion, the gov't papers are focussing on investing in smaller businesses, where the role of the investor is more cookie cutter (professionalise, invest in key hires, grow) vs proper mid-market, where it's all about finding efficiencies, lots of leverage, split up, hiring consultants etc. TBH the large end is not a space I know well.

    Institutional fundraise isn't doing well this year due to interest rate rises as investors have other places to put their money and the challenging outlook - large investors raised a shedload during COVID and now struggling to deploy, particularly when deploying large swathes of capital into businesses (vs property / infra etc.), again, due to the outlook. Lots of dry powder to deploy, but as they always say - never waste a good recession! You are right on VC in that the rules do sometimes encourage poor investment decisions.

    As for your final point - noone will ever know.

    The complexity of the CDOs wasn't really my point. It is that investors didn't know they were funding 100% of property purchases which were interest free for a couple of years i.e. they were paying someone's rent.

    Someone with a pension going into VC or PE is going to be similarly distant, and sooner or later, a fund manager will buy some junk.

  • shirley_basso
    shirley_basso Posts: 6,195
    edited August 2023
    What's the arguement here - that retail investors don't understand VC/PE, or that an asset manager won't have a 100% track record?
  • shirley_basso
    shirley_basso Posts: 6,195

    pangolin said:

    My default aviva pension is 20% bonds despite being ~30 years from retirement. This feels overly cautious.

    Might have been a few years ago; read a research note by Morgan Stanley last month put out a note that suggests that, volatility aside, returns in equities will be roughly around the same as bonds over the next few years.

    You never really know obviously.
    Seems a bit to pull research from a few years ago given where we are today, no?
    No i mean return on equities outperforming fixed income would have made more sense a few years ago.

    Argument is valuations are still mega high so the return are lower and more volatile in a inflationary environment and rates are high.
    When interest rates went up it was unusual that both equities and bond markets tanked. Now you can get a pretty good risk free rate of return which is closer to (but doesn't exceed) inflation, equities will fall, combined with the more challenging market outlook, they should stay down. That said, last 2-3 days aside, markets have been okay. Private markets are definitely down at least 1x, but this isn't a 'blip' any more, this is markets reverting to normality.

    Taking this into context of a pension - the volatility doesn't matter anyway, it's all about time in the market - wasn't it you that said Fidelity's best performing clients were the dead ones?
  • TheBigBean
    TheBigBean Posts: 20,551

    What's the arguement here - that retail investors don't understand VC/PE, or that an asset manager won't have a 100% track record?

    Retail investors won't understand it. Asset managers will milk them and potentially invest in things they shouldn't.

  • rick_chasey
    rick_chasey Posts: 72,517

    pangolin said:

    My default aviva pension is 20% bonds despite being ~30 years from retirement. This feels overly cautious.

    Might have been a few years ago; read a research note by Morgan Stanley last month put out a note that suggests that, volatility aside, returns in equities will be roughly around the same as bonds over the next few years.

    You never really know obviously.
    Seems a bit to pull research from a few years ago given where we are today, no?
    No i mean return on equities outperforming fixed income would have made more sense a few years ago.

    Argument is valuations are still mega high so the return are lower and more volatile in a inflationary environment and rates are high.
    When interest rates went up it was unusual that both equities and bond markets tanked. Now you can get a pretty good risk free rate of return which is closer to (but doesn't exceed) inflation, equities will fall, combined with the more challenging market outlook, they should stay down. That said, last 2-3 days aside, markets have been okay. Private markets are definitely down at least 1x, but this isn't a 'blip' any more, this is markets reverting to normality.

    Taking this into context of a pension - the volatility doesn't matter anyway, it's all about time in the market - wasn't it you that said Fidelity's best performing clients were the dead ones?
    Yup yup.
  • shirley_basso
    shirley_basso Posts: 6,195
    edited August 2023
    Retail investors are the beneficiary, not the client.

    The Local Gov't Pension Schemes are the client, who allocate the pension pots on behalf of the pensioners, generally with large, well known asset managers. PE and VC will simply become an asset class where the LGPS becomes a direct investor of a small portion of their funds (5% proposed). This allows them to actually exercise more, not less control over where that money goes as they will have a direct mandate with the GP as opposed through a fund of funds and intermediery. LGPS either invest directly, but more generally pool with regional LGPS and specify that the capital is reinvested back into the region(s) from where it originated. The current alternative being allocating a small amount to "Aviva Mid Cap Private Equity" who will in turn scattergun it around PE houses anyway.

    These direct allocations are made with specific mandates around what they can and can't do - much like with normal PE funds, who report quarterly and provide LP updates, like normal PE funds.

    Now - clearly there is a risk that increasing the portion of funds allocated to PE/VC investors will encourage unscrupulous activity from shady operators without a track record, but that is always a risk, and hopefully everyone has learned their lesson from the private jet guy I referenced above. As always, LGPS and trustees should be doing their due diligence.

    None of what the government is proposing is new, they are encouraging more of it. And, for Stevo's benefit - I think the Tories are doing a good thing by encouraging it for the reasons Rick Chasey specified.

    The mandate for PE type stuff would be quite easy to propose as it exists already. To get the right risk / reward level for a VC type fund that took pension money would be tricky, but not impossible. And to the points we both made about 'rushing money out the door on poor investments' you can easily document a mandate which avoids that - generally by having an open-ended fund or tweaking the fee structure.
  • TheBigBean
    TheBigBean Posts: 20,551
    As an aside, what lessons learned do you think there have been since Thurrock council's chief financial officer went rogue? Where is he now? Why are people from the council not being prosecuted?

  • shirley_basso
    shirley_basso Posts: 6,195
    I would hope for starters it means that anyone allocating council / pension fund money will come under a lot more scrutiny so will be a lot more careful about where they put funds and do their due diligence.

    I haven't read anything detail, but the valuation report for starters was a bit off - that the guy got the valuer to increase the output prices (by quite a large sum IIRC) to justfiy a higher valuation.

    He's not the first or last CFO to go rogue. The CFO large, local company to me lost his company over £4m on FX swaps (the whole year profits) as he started speculating instead of hedging.
  • rick_chasey
    rick_chasey Posts: 72,517

    I would hope for starters it means that anyone allocating council / pension fund money will come under a lot more scrutiny so will be a lot more careful about where they put funds and do their due diligence.

    I haven't read anything detail, but the valuation report for starters was a bit off - that the guy got the valuer to increase the output prices (by quite a large sum IIRC) to justfiy a higher valuation.

    He's not the first or last CFO to go rogue. The CFO large, local company to me lost his company over £4m on FX swaps (the whole year profits) as he started speculating instead of hedging.

    That's the LGPS isn't it? The Council BB is taking about wasn't running pension money, unless I'm getting my stories confused.
  • shirley_basso
    shirley_basso Posts: 6,195
    edited August 2023
    Sorry yes - but the lesson hopefully learned by the council screw up is that anyone investing / allocation capital on behalf of the public sector will be extremely diligent, hopefully avoiding it from happening again - as it's another story that paints the broader industry in a bad light.
  • rick_chasey
    rick_chasey Posts: 72,517
    I think leaving investment to qualified professionals is not a bad idea.
  • TheBigBean
    TheBigBean Posts: 20,551

    I would hope for starters it means that anyone allocating council / pension fund money will come under a lot more scrutiny so will be a lot more careful about where they put funds and do their due diligence.

    I haven't read anything detail, but the valuation report for starters was a bit off - that the guy got the valuer to increase the output prices (by quite a large sum IIRC) to justfiy a higher valuation.

    He's not the first or last CFO to go rogue. The CFO large, local company to me lost his company over £4m on FX swaps (the whole year profits) as he started speculating instead of hedging.

    The problem is though that no one other than the residents of Thurrock and the UK tax payer is suffering as a result of, and I'm being very generous here, gross negligence. People need to be held accountable. If they are, then future generations may be more responsible.

    As to what was off about Thurrock's loan. Nothing was not off. I can't think of any aspect of it which could be justified. They were advised by Mr Private Jet to lend Mr Private Jet 100% of the money, so that he could buy some solar farms. Mr Private Jet would then take all the upside personally as well as a fee for arranging to borrow the money. Mr Private Jet then needed some more money for himself, so they lent it to him. The loans were structured to have a massive step up in interest payments (serious alarm bells), so Mr Private Jet could cream off masses at the beginning. Thurrock council had security over the solar parks. Their trustee looked after their security for them, and you'll never guess who the trustee was.

    Your FX CFO's company potentially has a claim against the bank offering the swap. They shouldn't sell swaps in those situations.









  • shirley_basso
    shirley_basso Posts: 6,195
    Well that's a given but there are a lot of bad eggs out there who are qualified professionals and not to be trusted.
  • shirley_basso
    shirley_basso Posts: 6,195

    I would hope for starters it means that anyone allocating council / pension fund money will come under a lot more scrutiny so will be a lot more careful about where they put funds and do their due diligence.

    I haven't read anything detail, but the valuation report for starters was a bit off - that the guy got the valuer to increase the output prices (by quite a large sum IIRC) to justfiy a higher valuation.

    He's not the first or last CFO to go rogue. The CFO large, local company to me lost his company over £4m on FX swaps (the whole year profits) as he started speculating instead of hedging.

    The problem is though that no one other than the residents of Thurrock and the UK tax payer is suffering as a result of, and I'm being very generous here, gross negligence. People need to be held accountable. If they are, then future generations may be more responsible.

    As to what was off about Thurrock's loan. Nothing was not off. I can't think of any aspect of it which could be justified. They were advised by Mr Private Jet to lend Mr Private Jet 100% of the money, so that he could buy some solar farms. Mr Private Jet would then take all the upside personally as well as a fee for arranging to borrow the money. Mr Private Jet then needed some more money for himself, so they lent it to him. The loans were structured to have a massive step up in interest payments (serious alarm bells), so Mr Private Jet could cream off masses at the beginning. Thurrock council had security over the solar parks. Their trustee looked after their security for them, and you'll never guess who the trustee was.

    Your FX CFO's company potentially has a claim against the bank offering the swap. They shouldn't sell swaps in those situations.

    Superb, especially given the number of listed infrastructure investors and funds out there who invest in, you guessed it, solar.

    Unsure of the granular details of the swaps - all I know is that when the USD/GBP FX rate swung heavily against him and he was out of the money, he nearly bankrupt the company with the margin calls.
  • TheBigBean
    TheBigBean Posts: 20,551
    One of my hobby horses is about how unpunished financial crime is. With the exception of the LIBOR patsies, no one ever seems to be prosecuted.
  • shirley_basso
    shirley_basso Posts: 6,195
    A far more virtuous pursuit than trains running on time, that's for sure.
  • pangolin said:

    Anyone got strong opinions on this?

    https://www.gov.uk/government/news/chancellors-mansion-house-reforms-to-boost-typical-pension-by-over-1000-a-year

    A vocal bloke at work is making a fuss about "the government deciding to raid citizen pension pots to provide venture capital funding to start-up companies ... incentivised by exorbitant fees" i.e. the announcement allows the pension providers to charge more, hence they have signed up.

    I could be the vocal bloke at your work apart from the fee bit.

    I see it as the market has chosen not to allocate resources to these potential investments so the Govt has decided to invest part of your pension pot instead.

    I think these are totally inappropriate for DC (or mature DB) and if a holder of a DC scheme is sophisticated enough to want to do this then they can crack on.

    I passionately believe this is a fvck in disgrace.

    For info I am a DB trustee who sits in rooms with very knowledgeable pension experts and they shake their heads in despair.

    Investing in this stuff is what brought Woodford to his knees so it really is high risk
    As someone who knows much more than me, as I know just enough to be dangerous but that's about it, what is it that makes this so unappealing for UK pension funds but not North American or Scandinavian funds, that do do a lot of investing in this space.
    If you have an ongoing funded DB scheme like Canadian teachers then their liabilities stretch over a hundred years and have the backing of the employer to make up any shortfall. That is very different from an average Joe paying into their compulsory DC scheme.

    What is the difference over here? most of the private schemes are shut so are in run off and have a much shorter horizon and most of the public sector schemes are unfunded so have nothing to invest.
  • pangolin said:

    Anyone got strong opinions on this?

    https://www.gov.uk/government/news/chancellors-mansion-house-reforms-to-boost-typical-pension-by-over-1000-a-year

    A vocal bloke at work is making a fuss about "the government deciding to raid citizen pension pots to provide venture capital funding to start-up companies ... incentivised by exorbitant fees" i.e. the announcement allows the pension providers to charge more, hence they have signed up.

    I could be the vocal bloke at your work apart from the fee bit.

    I see it as the market has chosen not to allocate resources to these potential investments so the Govt has decided to invest part of your pension pot instead.

    I think these are totally inappropriate for DC (or mature DB) and if a holder of a DC scheme is sophisticated enough to want to do this then they can crack on.

    I passionately believe this is a fvck in disgrace.

    For info I am a DB trustee who sits in rooms with very knowledgeable pension experts and they shake their heads in despair.

    Investing in this stuff is what brought Woodford to his knees so it really is high risk
    I was of the understanding that it was the fact that Woodford was investing outside of his remit, and the lack of liquidity when he was forced to sell up is what brought Woodford to his knees, not the risk.
    He was investing outside of his remit but the lack of liquidity is one of the things that makes these things risky, for every Apple there is a hell of a lot of dogs that swallowed peoples money.

    If more sophisticated investors want to invest their hard earned then let them crack on, I personally think it is very wrong for the Govt to coerce the uninformed to unknowingly invest in a sector that the professionals have declined to.