As sponsors continue to prolong holding periods in anticipation of a valuation rebound, Border to Coast Pensions Partnership – one of the UK’s largest pension pools – is calling on managers to go against the grain and execute disciplined, timely exits.

Portfolio manager Christian Dobson said that a key consideration when selecting general partners (GPs) is their ability to deliver sustainable returns at the fund level, rather than chasing maximised outcomes on individual deals.

In what remains a challenging dealmaking environment, sponsors face the dilemma of when best to exit, particularly for those assets that were bought at the top of the market valuations.

Holding on to an asset longer to improve its multiples may benefit a specific deal team’s track record but could be detrimental to the fund’s overall internal rate of return (IRR), which is highly sensitive to time, he said. Therefore, deal-level and fund-level performance are often misaligned.

“Instead of exiting, many managers are choosing to hold onto assets for an additional year or two in the hope that the companies can grow into their valuations to achieve a stronger multiple on exit,” Dobson said. “The issue is actually that by holding those investments one, two years longer, it’s potentially degrading your IRR versus selling it at the current point in time.”

Sponsors should evaluate whether holding on longer would deliver better returns or whether they should recycle the capital into new opportunities, he said.

Conversely, this may also sometimes mean not rushing to exit top-performing companies, even if market conditions are favourable. Holding onto compounding performers can be more beneficial to long-term fund returns. In some cases, it might be better to exit weaker assets first to optimise the portfolio composition, he said.

Portfolio construction restarts every three years

Border to Coast is seeking to make six private equity fund commitments totalling GBP 585m until next March, as part of its 2025-2026 deployment plan, Dobson told this news service in April.

The limited partner (LP) – an institutional investor in private equity funds run by GPs – will consider new and existing buyouts, special situations, growth and venture capital GPs across North America, Europe, and Asia.

Among the managers it has existing relationships with are KKR, Thoma Bravo, Nordic Capital, AlpInvest, and Endless.

Border to Coast operates its private markets programme akin to a mini fund-of-funds, Dobson explained. It builds a diversified portfolio of funds every three years, but underlying schemes have the flexibility of pooling money on an annual basis, which is then deployed over the following 12 months into external funds.

After three years, a new portfolio begins, continuing the rolling structure. Its previous three-year portfolio, finished this March, totalled GBP 1.6bn, closely matching the GBP 1.7bn raised in the cycle before that, according to Dobson.

The pool, in the seventh year of private equity deployment, has started a new cycle with the GBP 585m raise earlier this year.

Dobson said that Border to Coast is open to investing in all fund sizes, with commitments typically ranging from GBP 50m to GBP 120m.

Though market conditions can shift significantly over its deployment period, the LP puts less emphasis on sector or asset class views, nor does it time the market, and instead deploys based on asset allocation strategies set by its partner schemes. It focuses on choosing the best-in-class managers.

Alongside financial performance, the allocator continues to prioritise environmental, social and governance (ESG) issues and responsible investment as a core component of its manager evaluation process, Dobson said.

Push to UK opportunities

Similar to other UK pension allocators, through recent government-led pension reforms, Border to Coast has been on a push into UK-based investing. Last April, it launched a UK Opportunities portfolio, which has so far raised GBP 500m from underlying schemes.

It seeks private equity, real estate and infrastructure investments that will add value to UK businesses and the broader economy.

In a report produced in March, Border to Coast revealed it has already invested more than GBP 12bn, or 23% of total pooled investments, into UK public and private markets. This includes nearly GBP 1.3bn directly into UK private markets, making up 17% of its global private markets programme.

But the allocator highlighted systematic barriers to UK private equity in the report, such as the statutory duty on pension funds to cap fees, which ignores the additional returns that investments with higher fees can deliver, and an underdeveloped local asset management ecosystem.

“It’s not an easy problem to solve,” Dobson said, adding that clearer guidance from the government and regulators on value-for-money and a greater focus on returns and less on fees will help drive more investments in the UK.

“If you’re going to make investments in small funds, in particular venture capital funds, headline fees may be higher. But there is a chance returns may be higher. Focusing purely on fees may not always drive the correct behaviour in terms of getting encouraging investment in this space,” he noted.

Dobson added that government-linked entities, such as the British Business Bank, British Patient Capital and the National Wealth Fund, could also help draw capital into the UK, potentially through either risk-sharing or reducing the downside or upside with investors.

The British Business Bank has recently responded to the call for more UK investing by launching a series of venture funds under an initiative called British Growth Partnership, which, for the first time in the bank’s history, has opened up to third-party LP capital.

Border to Coast manages over GBP 55bn of assets as of 31 March 2025.

The 11 underlying pension schemes it partners with include Durham, Bedfordshire, Cumbria, East Riding, Lincolnshire, North Yorkshire, South Yorkshire, Surrey, Teesside, Tyne and Wear, and Warwickshire.