BT's pension scheme is investing GBP 1bn in private equity through Hermes.

The scheme, which is the largest in the UK's private sector, has done the deal with Hermes with a mandate that will seek to avoid large buyouts.

Half of the three-year directive given to the asset manager's private equity arm will be used to invest alongside buyout firms on specific deals – rather than through the industry's traditional pooled funds.

Peter Gale, Hermes GPE's head of private equity and chief investment officer said its investments for BT will focus on nimbler strategies over general leveraged buyouts.

He said: "When investing on behalf of BT previously, we saw value very much in the larger end of the buyout world."

"We think the risk-reward has now shifted from that more vanilla investment to the niches of private equity."

The mandate replaces the one given to Hermes in 2011.

By June last year the BT scheme, which had closed to new members in 2001, was struggling under a GBP 7bn deficit, the extent by which payout liabilities to its mostly retired members outpaced its GBP 40bn assets.

BT's investment will raise Hermes GPE's assets to GBP 4bn.

Hermes manages GBP 30bn in assets overall.

Gale said the move shows that a major pool of capital in the UK market has retained its appetite for private investments.

He added that Hermes GPE would be "going firm" on making co-investments half of the mandate, given that returns from its existing portfolio had been double those from funds.

He said co-investments have drawn other investors as a way to cut fees they pay on private equity funds, as well as allowing the industry's backers to be pickier about what deals they want to invest in.

"Lots of people are doing it, but very few are looking at it as a genuine investment exercise," he added.

First published 13.08.2015

Lindsay.sharman@wilmingtonplc.com