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Supplements » SFA Report 2022

Private markets roundtable: Breakaway performance

Challenges
Although private assets make sense for some DB schemes – depending on where they are in their journey – the same may not apply to defined contribution (DC) schemes, which are closer to investors and can be considerably smaller than their DB counterparts. McNichols says there may be liquidity challenges with private markets and DC schemes.

“Offering ‘X’ percent of liquidity on a periodic basis is theoretically possible, but I can see circumstances in which that would be difficult to do. Making sure investors are aware of those limitations and what the impact could be on their liquidity is a key concern of mine.”

WTW’s Hails, meanwhile, points out smaller DC plans do not necessarily have the resources to invest in what he describes as “sophisticated ways”, as private investing comes with a hefty price tag. However, he explains that master trusts are becoming increasingly common in the UK pensions space, which could help to solve this problem.

“There are some challenges around investing in private markets for DC, and costs and fees are a big part of that. Master trusts are a key part of the solution, as they are big enough to have the resources to invest in a much more sophisticated way,” Hails adds.

Cost of doing business
It is no secret that private assets are not the cheapest option available to investors. For example, the ongoing charge levied by the average investment trust in the Association of Investment Companies private equity sector is just over 1.7%, excluding any additional performance fees. This compares to an average of 0.84% among investment trusts in the AIC global equities sector, excluding performance fees.

However, panellists believe that going private is worth the extra cost.

For McNichols, private investing’s more substantial price tag is reasonable because of the returns offered by the sector. “Private asset management services are more expensive, [and] it costs more for us to provide an origination platform that is robust. In addition, public market investors pay a bid-ask spread in the market, so their ‘platform costs’ are, to some extent, subsumed into total returns that are lower than they otherwise might be. Private market investing is a premium product. The nature of the relationships between investors and their companies are different in private markets, and more conducive to finding good, long-term solutions to create value.”

McNichols returns to the key factor of the illiquidity premium, offered by private markets, and how they could also give investors exposure to a wide range of companies, sectors and assets.

Porkolab agrees, adding: “[With some private assets], you are giving up liquidity and you are compensated for that with higher returns. Similarly, you tend to access a more complex universe of investment options, and you are expected to be rewarded for that complexity and a higher level of sophistication.”

With all that said, the wider use of private markets could spell good news for investors willing to consider these alternatives, aiming to increase diversification and access higher yields and returns.

The LawDeb director says the number of funds in the market has increased significantly, and that the market is becoming more efficient, which could also reduce costs for institutional investors. “As the efficiency increases, and players become more comfortable with all sorts of market dynamics, costs will come down – but we can’t expect them to come down to the same level associated with passive listed investments,” he adds.