HUGH OSMOND knows from bitter experience the perils of deals loaded with debt. Four years ago, the entrepreneur was sent packing when his audacious, £5.4 billion bid to buy hotel and pub group Six Continents was judged too cheeky by shareholders.

So it’s not that surprising he has come up with a scheme to help private-equity firms that find their bids being thwarted by yawning pension-fund deficits.

It is a clever angle on the emerging market for pension buyouts where companies can offload their pension liabilities to an insurer in return for a chunky premium.

For Osmond – best known for building up and floating Pizza Express and the pub chain Punch Taverns – it is just the latest chance to make serious money out of managing life and pension assets through Pearl Group, the insurer closed to new business and bought for £1.07 billion two years ago by his Sun Capital investment vehicle and the private-equity house TDR.

His timing looks good. In the past few months, a number of high-profile, private-equity deals have been scuppered or left delicately balanced over this thorny issue.

Osmond’s solution is a product designed by Axial, an investment-management business formed earlier this year and owned by Pearl. He is keeping the exact mechanics under wraps, but is convinced that Axial can undercut any rival on the costs of a buyout.

Pearl has advantages. The group is an established insurer with £30 billion in funds under management and is a top 10 annuity provider. Osmond argues this should give comfort to pension trustees.

“We’re running funds that will behave in almost the same way as the target pension schemes. It’s not a new game for us,” he said.

As a privately funded group, it can also take more risks – unlike some other start-ups answerable to big shareholders.

Then there is Axial. Osmond has slated life insurers for not having proper risk management. In the past two years Pearl has introduced sophisticated, risk-management techniques used by investment banks. He has also paid top dollar to recruit a series of heavy hitters, investing £10m in Axial. These include Jan Straatman, the former chief investment officer of ABP, the huge Dutch public-sector pension fund.

“We scour the world,” said Osmond. “We look at Yale and Harvard and investment banks for the top talent. When you are an insurer you cannot recruit someone at Goldman Sachs earning £1m a year. We can.”

The result is that Axial can analyse liabilities and assets in microscopic detail, assessing the impact on an individual policy of anything from a surge in oil prices to changes in bond yields. Axial is not a fund manager, but an asset allocator, placing 70% of the Pearl Group’s funds with external managers.

Private-equity firms will no doubt lap up Axial’s plan. Convincing pension trustees will be trickier. “The question is whether trustees will buy it. They’re a conservative bunch. They’ll need to have a proposal that is absolutely compelling,” said an executive at one rival.

The other snag is the plan will probably be copied. The pension-buyout market has attracted some formidable players, including Goldman Sachs and UBS, which last week linked up with the insurer Aegon. Several hedge funds are backing different start-ups.

Despite the huge interest and a market that could be worth £1,000 billion, there have been few big pension buyouts – partly because investors have not put pressure on finance directors to do deals. Another factor is that pension schemes and insurers value deficits in different ways, which can make the premium needed to pull off a buyout unattractive.

Still, if Osmond is right, Pearl could be about to cash in on a lucrative new market. But why should a leisure entrepreneur decide to invest in the murky world of life insurance?

Osmond, who occasionally competes in duathlons (triathlons without the swimming), obviously likes a challenge. He said: “Insurers had been through mis-selling scandals – pensions and endowments – and the bear markets and new regulation after [the collapse of] Equitable Life meant there was going to be a shake-out. In a bizarre way the characteristics were similar to the pubs business.”

Osmond’s first attempt at a takeover failed when he was beaten by Clive Cowdery’s Resolution to acquire the closed life funds of Royal & Sun Alliance. But Sun and TDR got their revenge by buying Pearl. The Pearl deal has been controversial, with Sun and TDR accused of making vast profits as policyholders suffered poor returns. In 2005, investment returns at with-profits funds averaged 14.4% against 11.2% for Pearl and 8.7% for London Life, another closed book in the group. In 2006 Pearl’s funds returned 8.3% in line with the industry average.

Pearl has been an incredibly profitable deal. The embedded value – a measure of the worth of policies – jumped from £1.3 billion before the takeover to £2.1 billion a year later. By funding the deal with just £350m in equity and after some clever refinancing, Osmond and his partners made four times their money within a year.

Osmond is stung by suggestions that policyholders have not benefited. When he took over, Pearl was technically insolvent, relying on shareholder support of £500m to keep it afloat. The funds were mostly invested in low-returning bonds.

The Axial investment techniques have had a significant impact. The group is “out of the regulator’s intensive-care ward”, he said, and self-sufficient in capital terms, while 90% of the £500m surplus cash in the Pearl funds will be distributed to 1m policyholders over the next few years.

Pearl life funds have also increased investment in equities from 20% to 50%. At London Life, the ratio has gone from 10% to 35%. As for the NPI funds at Pearl, they are still languishing – “a work in progress”, according to Osmond that should lead to real benefits for policyholders in 18 months.

He has been outsmarted by Resolution on a number of other deals, including being frozen out of the £3.5 billion sale of the Abbey National closed life funds.

“Clive has been very good at getting the deals done,” he admitted. “Perhaps we have been too focused on minding the shop.”

But now Osmond is on the hunt with a potential £7 billion war chest for closed fund deals. Although the obvious distressed sales have happened and deals have slowed, he is convinced there are more to come. If not, there are pension buyouts to chase. As he said: “Watch this space.”

BUYOUT RIVALS

Aegon and UBS Joint venture that focuses on schemes with £300m in liabilities

Goldman Sachs Targets larger schemes

Legal & General Targets smaller deals

Lucida Led by former Prudential chief executive Jonathan Bloomer

Paternoster Goes for medium-sized deals

Pension Insurance Corp Focuses on larger schemes

Prudential Pulls off occasional large deals

Synesis Life Led by Isabel Hudson, a former Prudential executive. Backed by JP Morgan, Royal Bank of Scotland and Warburg Pincus

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