Given the improved funding position of defined benefit (DB) schemes, some which have moved into surplus, over two-fifths (43 per cent) of UK private equity firms have factored the DB funding landscape into their investment strategies, research from Cardano has found.

Cardano also found that an additional fifth (20 per cent) of firms were in the process factoring the favourable DB funding landscape into their investment strategies.

The research highlighted that UK private equity firms are increasingly considering, and open to, investing in businesses that come with a DB pension scheme.

Furthermore, private equity firms who have experience of working with DB schemes to see them as less of a blocker to investment decisions now, relative to the period pre-2022, when interest rates were at historic lows.

The research also revealed that over two thirds (67 per cent) of private equity firms said that being able to access a scheme’s surplus, either at any time or at the point of the scheme being wound up, would make a business an attractive investment target.

Meanwhile, 63 per cent of firms stated the broader investment opportunities a well-funded DB scheme would offer, such as businesses with DB schemes now being transactable, was the second most important factor when looking at DB schemes.

This was followed closely by 61 per cent of firms considering a lower risk of regulatory intervention as an important factor when looking at DB schemes.

However, for schemes that are in deficit, almost three quarters (74 per cent) of all private equity firms had no knowledge of or were unsure of the solutions available to schemes to de-risk and create value for investors in the long-term.

In addition to this, awareness varied depending on size of private equity firm as large-caps’ awareness (47 per cent) was greater than small-caps (5 per cent).

Cardano said that a lack of knowledge in improving a scheme’s funding position or awareness of options such as buy-in or buyouts could result in private equity firms overlooking attractive businesses that have a DB scheme in a deficit position.

Cardano managing director, Nick Gibson, said private equity firms are “increasingly eyeing” pension scheme surpluses as an attractive source of untapped capital.

He explained that this was certainly a shift from the historically cautious approach to mergers and acquisitions activity involving DB schemes, “reflecting improved funding levels that bring lower regulatory risk and lower risk of deal value leakage”.

“In the hunt for new opportunities in a highly competitive private equity market, investors that understand the DB pension dynamics have a new opportunity to create value that was previously not available to them,” Gibson said.

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