There is a hot new topic on the Isle of Wight, where I live. Red Funnel, one of the two leading ferry companies that serve the island, has been bought by yet another private equity firm.

Many feel that the stereotypical effects of a company being bought out (asset stripping, redundancies, high prices and poor service) already apply to the ferries, so they are simply getting ready for our gateway to the “mainland” to become even less palatable.

Those stereotypes may be all most of us know about private equity. But we may need to learn more soon — because it is about to affect our pensions.

Rachel Reeves, the chancellor, has been pushing for UK pension schemes to increase their exposure to private equity investing. The government’s lobbying resulted in 17 pension firms signing the Mansion House accord in May, agreeing to invest at least 10 per cent of workplace pensions into private assets by 2030.

The switch to riskier investing is starting to become a reality.

Aviva, a leading pension scheme manager, has plans to launch a new default workplace pension scheme — the type that most employees are automatically invested into — which would have 25 per cent of assets invested in private equity, private credit, infrastructure and property. The two default schemes it offers at the moment have 0 and 10 per cent invested in such assets.

Legal & General is making similar moves, with a target of 15 per cent of its default pension fund to be invested in its Private Markets Access fund. Fidelity is doing the same.

The changes will affect the millions of workers who are automatically enrolled into such pension schemes and will shift billions of pounds of our savings towards private assets. So what, exactly, will we be investing in?

Private equity investing involves companies that are not listed on the public stock exchange. There are some large, well-known businesses in the sector (for example, the mammoth AI company OpenAI is unlisted) but much of it is made up of small, young businesses.

The attraction is that they could offer huge future growth. These companies are often in their early stages and, if they do well, they can deliver higher returns than listed firms.

They are also considered a more long-term bet, which means that investors, managers and the companies themselves can shrug off short-term volatility and knee-jerk market reactions. (The benefit for the chancellor, of course, is an injection of cash into a swathe of start-up UK companies, hopefully bolstering the country’s growth.)

Hamish Mair from the fund manager Columbia Threadneedle said: “Private equity offers opportunities that are not widely known or appreciated. It follows that skilled and diligent investors who can find these companies will stand to make strong investment returns.”

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The downside is risk. Because the companies are generally early-stage and high-growth, they are inherently riskier and more likely to fail. They are also not subject to the same reporting standards as public companies, so it can be harder to assess their performance and whether they are in good shape.

Jack Bishop from the advice firm Quilter Cheviot said: “It’s not for everyone. It’s most suitable for investors with a higher risk tolerance and the financial resilience to withstand significant fluctuations in value.

“It is also good for those who want exposure to high-growth companies before they become publicly listed. But investors must be comfortable with limited transparency and infrequent reporting.”

Is this the sort of investment that millions should have their savings automatically funnelled into?

The risks

You can see why pension schemes like the idea of private equity. According to the British Private Equity and Venture Capital Association, the sector has returned an average of 15.8 per cent a year over the past decade. But as anyone with any experience in the investment world will tell you (and any investment advertising will say), past performance is not always indicative of future returns.

“Private equity isn’t the panacea of the investment world. It’s still fund managers buying into companies and getting some right and some wrong,” said Ben Yearsley, an investment consultant at Fairview Investing.

“They aren’t superheroes who magically get everything right 100 per cent of the time. In fact, when they get it wrong it can be more disastrous than for mainstream investing, as there’s often no way to sell the investment.”

The good news is that any investment will be in your pension pot, where a lack of liquidity and greater volatility will be less of an issue for those savers who are decades from retirement.

The bad news is that for workers who are saving into defined contribution (DC) pensions — as opposed to the coveted final-salary defined benefit (DB) pensions — the responsibility for their retirement savings is entirely on their shoulders.

DB schemes, which pay you a set income related to your salary, have long invested in private equity as a way to meet those guaranteed payouts across a huge pool of pensions. DC savers, however, are dependent on how much is in their pension pot when they come to retire — if their investments have taken a dip, their income will be lower or they will have to put off retirement.

It is unclear whether, with this responsibility in mind, most pension savers would knowingly invest their pot in something as risky as private equity. Even Mair, who runs a private equity fund himself, says that the old adage “if you can’t afford to lose it, don’t invest it” rings true.

He said: “There are no end of things which could go wrong. A company’s original investment thesis could be flawed, the management may not be up to the plan, they may just take too long, they may run out of capital, or they could be hit by an external shock which no one anticipated.

“It is unlikely that you will lose all your private equity investment, but it is not impossible and it does happen.”

It’s certainly not the case that private equity shouldn’t make up part of your pension pot. For those that have looked at the risks, weighed up the pros and cons and actively decided to invest, it is an ideal, long-term investment that could turbo-boost your retirement savings.

However, it also isn’t a typical investment decision that should be taken lightly or automatically. I may be wrong to be cautious, and in many ways, I hope I am. Almost as much as I hope I’m wrong about the future performance of that ferry company.