Investments from pension funds can improve the productivity of portfolio companies, especially those that are small and privately held.
This is according to a new white paper from the International Centre for Pension Management, which assesses the effect that investments from pension funds have on companies.
As pension funds scramble to put capital to work in the private markets, this work shows that their investments do more than provide sorely needed capital to companies: It helps those companies become more efficient.
The ICPM used data from Experian and Statistics Denmark, sampling almost 15,000 companies, of which almost 600 had received capital from pension funds. The organization found that an equity investment from retirement systems improves productivity by between 3 percent and 3.5 percent on average.
The more capital invested, the more likely it is that a company will improve its productivity. An increase by one percentage point in the combined equity stake of all pensions investing in a firm raises productivity by between 21 and 22 basis points, according to ICPM.
Holding a stake in a company longer improves productivity too. An increase of one year or more results in a productivity gain of between 40 and 50 basis points.
The ICPM found that publicly traded companies tend to be more productive to the tune of between 7 and 8 percent on average. They suggest that this is because these companies tend to be larger and external shareholder pressures force them to become more productive.
They then observed that privately held companies can receive more benefits from pension fund investors. On average, the productivity effect of pension fund investments in these privately held companies is between 6.5 and 7 percent larger than for their publicly traded counterparts.
“Higher productivity with given inputs generates higher profits, which in turn translates into a higher share price, a higher dividend or an IPO/Sale of the company, if it is unlisted and the owners aim to cash in some of the extra value created,” the ICPM said.
So why do pension funds make the companies they own more productive? ICPM has a few ideas.
Pension capital can provide portfolio companies with the breathing room they need to start making improvements at the fund.
The long term commitments of pension funds is also useful. It “allows firms to invest in projects that favor long-term objectives, such as productivity enhancement or the deployment of a promising new technology that has not been fully developed and is expected to take quite some time to reach that stage, rather than invest in projects with shorter horizons or a need to improve margins on a short-term basis.”
There’s another benefit: The involvement of one institutional-grade investor, like a pension fund, begets other institutional investors. It offers a stamp of approval, in a way, and may persuade other investors to commit capital to a portfolio company.
