A third of mid-market GPs say no to pensions deficits

A third of mid-market GPs have said they will not invest in a company with a pensions deficit from a defined benefit scheme, according to a survey conducted by Grant Thornton Corporate Finance.

In a survey of 100 fund managers involved in deals worth between £5m and £200m, every VC questioned said they had completed at least one deal involving a company with a pensions liability over the past twelve months, while over 80% of respondents said this was not the case in the majority of their new investments.

Mat Bhagrath, partner at Grant Thornton Corporate Finance, says: “The fact that a third of VCs stated that they wouldn’t invest in a company with a defined pensions deficit is very telling. Few VCs have a true long-term view when making an investment. On average, are looking for a return in a three to five year period which, is too short a timescale to plug a pensions deficit.”

The survey also revealed that funds’ exposure to pension liabilities is small. Almost half of the respondents, 48%, said they have no deficits while 37% admitted to having pensions liabilities within a tenth or less of their portfolio. The remaining 15% declared significant deficits within a higher proportion of their investments, with 2% claiming the exposure was 70% of their whole portfolios.

The increase of pension deficits over recent years is the result of an underperforming stock market and improving mortality rates, and it was the implementation of FRS 17 in November 2001 which made it necessary for defined pension schemes to be included on the balance sheet.

“The fact that all the respondents to the survey stated that they had done at least one deal involving a company with a pensions hole over the past twelve months is not surprising and proves that occupational deficits are not a barrier to investment all the time,” continues Bhagrath. “While VCs tend to be adverse to investing in companies which need sustained, long-term investment to boost an under-performing pension scheme, they are likely to negotiate a reduced price in exceptional circumstances. If the deficit is significant, VCs are more likely to give way to trade buyers who generally take a much more long-term view when making their investments.”