Although it was overshadowed by president Trump’s latest tariff climb-down, the recent updated Mansion House Accord – backed by the PLSA (Pension and Lifetime Savings Association), the ABI (Association of British Insurers) and the City of London Corporation – was a key moment for UK financial markets and pension savers.

No fewer than 17 of the UK’s largest pension funds voluntarily agreed to invest at least £50 billion of assets in private markets by the end of this decade, with half of that targeted at the UK.

Chancellor Rachel Reeves welcomed the deal, which she said would ‘unlock billions for major infrastructure, clean energy and exciting start-ups, delivering growth, boosting pension pots and giving working people greater security in retirement’.

Overall, the government wants funds to invest as much as 10% of defined contribution default funds in private assets and says it will pass a bill later this year giving ministers the power to force funds to comply if its targets aren’t being met.

So, why are pension funds being ‘encouraged’ to invest in private assets, and why now?

A BOOST TO INVESTMENT AND RETURNS

The treasury argues pension funds are under-delivering for their stakeholders, and to generate better returns it wants them to inject up to £25 billion into the UK economy by 2030.

In a joint announcement, the PLSA, the ABI and City of London said the accord was aimed at generating ‘better financial outcomes for DC savers through the higher potential net returns available in private markets as well as boosting investment in the UK’.

‘Barriers to invest in private assets have reduced in recent years thanks to legislative and regulatory reform, as well as operational improvements, however further progress is needed,’ the announcement goes on.

The government claims its model shows that by investing in private markets, funds could improve their performance by 200 basis points or 2% per year over a period of 30 years.

That investment could be in infrastructure, property, private equity or private debt, and the treasury hopes that by making pension funds commit to backing UK projects it will attract international capital from sovereign wealth funds, particularly those from the Middle East and Asia.

Alistair King, Lord Mayor of the City of London, put it bluntly: ‘Here is a real opportunity to pump a number of local lead investors into projects which will allow sovereign wealth funds to crowd in behind.’

However, the accord notes allocations to the UK will depend on ‘a sufficient supply of suitable investible assets’ and on the implementation of ‘critical enablers’ by the government and regulators.

Yvonne Braun, ABI director of policy, long-term savings, health and protection, said the government needed to ‘support the industry’s ambition by facilitating a pipeline of suitable investment opportunities, tackling barriers to investments, and delivering wider pension reforms effectively’.

According to the Pension Investment Review, published by the government last November, Australian pensions schemes invest three times more in infrastructure and 10 times more in private equity compared to UK defined contribution schemes, and by copying their model UK schemes could deliver up to £80 billion of investment into ‘exciting new businesses and critical infrastructure while boosting savers’ pension pots’.

Andy Briggs, chief executive of Phoenix Group (PHNX), one of the 17 signatories of the accord, echoed these claims, saying the deal would ‘unlock investment in UK private markets while helping deliver better long-term returns and retirements for millions of pension savers’.

WHY NOW?

The lines between publicly-quoted assets and private equity, private debt, infrastructure and other ‘alternative’ investments have become increasingly blurred over time.

Pension investors can already access private assets through listed vehicles like funds and investment trusts – indeed, anyone who owns a FTSE 100 ETF or tracker fund already owns a share in private equity giant 3i (III) and global growth trust Scottish Mortgage (SMT), with its sizeable allocation to private companies, by default.

Investors in the FTSE 250 have a whole gamut of private equity, private credit, infrastructure and property funds to choose from. Commentators regularly extol the benefit of having a ‘diversified’ portfolio, preferably one including a sprinkling of private assets, property, precious metals and in some cases less regulated investments such as cryptocurrencies.

There is also a trend among US private equity managers to sign deals with retail platforms to offer a select group of their customers access to private debt and equity, with KKR (KKR:NYSE) teaming up with Capital Group, Blackstone (BX:NYSE) tying up with Vanguard and Wellington and Apollo (APO:NYSE) linking with State Street (STT:NYSE).

For the buyout firms, access to wealthy individual investors means they can syndicate their risk more easily, while for the traditional asset managers – who have been hammered by the rise of index funds and ETFs – it is a way to offer their customers the promise of higher returns from less liquid assets.

KKR and Capital are charging fees of 0.8% to 0.9%, which is less than some traditional funds, and are hoping to garner around $100 billion of retail assets using this strategy.

However, there are some who question whether this is the right time to be taking on less liquid assets such as private debt and equity, while others are warning this is exactly the wrong time to be doing so.

REASONS TO BE CAUTIOUS

High borrowing costs, demanding US public stock valuations and a weaker economic outlook in theory all make for a hostile investment landscape and point to weaker returns.

Taking these one at a time, the US federal funds rate is 4.25% to 4.5% and is likely to remain at these levels until the central bank has a clear view of the impact of president Trump’s trade policy on inflation and employment.

The markets have priced in at least 50 basis points or 0.5% of rate cuts this year, but some observers – including Lazard’s chief market strategist Ron Temple – believe the Fed won’t be able to cut rates at all this year due to sticky inflation.

Next, the S&P 500 is trading on 25 times trailing 12-month earnings, a 40% premium to its post-war average of 18 times and a 20% premium to the average of the last decade, so there are clear downside valuation risks.

Meanwhile, US consumer confidence readings – which are a good lead indicator for private consumption – are at their lowest level in years with ‘expectations’ at their lowest since 2011.

Add to that the policy uncertainty of Trump’s first 100 days in office and the stock market volatility that has caused, and this is probably not the time to be taking risks.

That applies equally to buyers of private assets, who tend to sit on their hands when volatility spikes as volatility is bad for valuations.

Observers will point to the $1 trillion of supposed ‘dry powder’ which the private equity industry is sitting on, but part of that amount relies on distributions from existing funds, which in turn rely on realisations, or the sale of assets.

‘EXITS ARE TOUGH’

According to consultants Pitchbook, there are more than 12,000 US portfolio companies owned by private equity, which equates to seven to eight years of inventory at the current rate of exits, well above the historic average.

Meanwhile, an analysis of Prequin data by S&P Market Intelligence shows global private equity exits slumped to their lowest in two years in the first quarter of 2025 as uncertainty over tariffs, which were yet to be announced, rattled markets.

‘Fund managers who entered the year optimistic about an uptick in divestments are facing new and unexpected headwinds as buyer and seller views on value diverge,’ says Jeremy Swan, a managing partner at CohnReznick who works in the advisory’s financial sponsors and financial services industry group.

Some UK private equity firms have already flagged that selling assets has become more challenging, with Literacy Capital (BOOK) noting in April 2025 buyers were being ‘more cautious before deploying capital’ and many investors being ‘very tentative and slow moving given the changeable political and market environment’.

3i’s chief executive Simon Borrows said on 15 May he expected activity across the private market ‘to be slower over the near term given the increased macro-economic and geopolitical uncertainty’, a comment which contributed to a sharp fall in the company’s share price.

A prime example of the difficulty of exits is Reckitt Benckiser’s (RB.) struggle to sell its cleaning products business, which includes the AirWick, Cillit Bang and Dettol brands, with the firm warning in its first-quarter update that volatile markets meant the sale could be delayed until the end of the year.

The UK company had been in talks with US buyout firms Apollo and Lone Star, with analysts estimating the unit could fetch a price of between $4 billion and $5 billion, but Apollo withdrew from the race and Reckitt was forced to admit market conditions could still impact the year-end timeframe.

Perhaps the most negative view to date has come from billionaire industrialist Nassef Sawiris, who not only buys and sells assets but also has stakes in large buyout firms.

In an interview with the Financial Times, Sawiris argues the private equity industry is past its peak and faces massive challenges in selling off trillions of dollars of assets.

‘Private equity has seen its best days…They can’t exit. Exits are so tough.’

Investors in private equity firms are growing increasingly frustrated at the lack of distributions in recent years, says Sawiris, with managers using ‘continuation funds’ to recycle capital by moving assets into a new vehicle rather than finding a buyer or listing them publicly.

Continuation funds, which have increased sharply in number in recent years, are ‘the biggest scam ever because you say “I cannot sell the business, I’m going to lever it again”,’ says Sawiris.

If buyout managers can’t sell assets, they can’t raise cash for new investments and will struggle to raise funds from their traditional backers.

Whether this is the right time for the UK government to be encouraging pension funds to plough savers’ money into private equity, therefore, only time will tell.

Disclaimer: The author (Ian Conway) owns shares in Phoenix Group.

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