Private Equity

Lord Davies of Brixton Excerpts

Thursday 20th November 2025 Grand Committee

[Lord Davies of Brixton (Lab)]

My Lords, I thank my noble friend Lord Monks for introducing this debate on an important subject and the noble Baronesses, Lady Stedman-Scott and Lady Moyo, for their interesting contributions. They presented a powerful case in favour of private equity, but there is another side to the story. My noble friend Lord Monks explained, as I am sure my noble friend Lord Sikka will, some of the problems created by private equity. I am afraid that I am not as sanguine as the noble Baroness, Lady Moyo, that the bad old days are over. The potential is still there—it has not gone away. It is about the way that this tool is operated. You cannot deny the problems of the past. What guarantee is there that they will not return in the future?

My particular interest in private equity is in the way it has become embroiled in current debates about pension schemes. The Mansion House accord, mentioned by the noble Baroness, Lady Stedman-Scott, seeks to commit pension schemes to invest significant amounts in private equity. In the House of Lords, we will shortly receive the Pension Schemes Bill, which explicitly refers to the need for large pension funds to be able to invest in private equity. It is a very topical issue.

The promise is attractive. We are told that it will lead to higher returns; in introducing the Mansion House accord, the Treasury specifically referred to the higher potential net returns for savers. I suspect there is a significant element of survivor bias in these figures. None the less, the higher returns are not a free lunch; they come with the downside of failure. Private equity investments are not by their nature successful; they require the hard work and knowledge of experienced investors.

We need to identify the problems with private equity in its own terms. My noble friends will point out some of the other problems that have been faced, but one is illiquidity. As pension funds are operated at the moment, any member is entitled to move their money out and take it somewhere else, or to use it to buy an annuity when they get to retirement. Illiquidity, which is inherent in private equity funds, is a problem for pension funds.

Another problem is valuation uncertainty. Pension funds are required to tell their members what the fund is worth. The funds held in private equity are calculated in a way that, at best, we could describe as opaque. Members will be given a figure as to what it is worth, but it is not the same sort of figure as in market investments, where there is a market and you know what the investment would actually raise if you sold it tomorrow. You do not know what your private equity investment will raise if you have to sell it tomorrow.

Then there is the inevitability of higher costs and fees being charged. In some way, that is the point of private equity—so that advisers can charge higher fees, which are inevitable. Finding these splendid investment opportunities, as previous speakers have identified, does not fall into people’s laps. It requires hard work and skill, which comes at a significant cost. Talking about private equity without recognising the costs involved is wrong.

Of course, there is the overall problem of really knowing what these funds are doing. There have been well-attested cases reported in the Financial Times of private equity funds selling their investments to a self-owned subsidiary. This is not uncommon; the sort of financial structures which are developed in order to hold private equities are, at best, obscure, as I said earlier. Then there is the alpha problem, with the Government as a fiduciary in pension funds; it is the trustees who should be taking the decision and not the Government.