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The pitch is persuasive. The shift from public to private capital has been decades in the making. UK pension funds, which invest far less in private markets than some of their peers, could boost returns, and fuel economic growth. But pushing pension savers’ investments into costlier, riskier assets is an uphill struggle.
Pension providers have made a start. Eight out of 11 signatories to the 2023 Mansion House agreement are developing new funds or vehicles to increase unlisted equity investment, according to the ABI. The Mansion House signatories are aiming to ramp up their allocation to private assets more than ten-fold to 5 per cent by 2030.
Phoenix is setting up a private market investment manager called Future Growth Capital in partnership with Schroders. It is making an initial commitment of £1bn, though investment could increase to between £10bn and £20bn over the next decade with more fundraising.
Legal & General recently launched the L&G Private Markets Access Fund, giving its 5.2mn defined contribution members an opportunity to invest in private markets. Aegon recently announced plans to introduce private market investment into its largest workplace default fund.
But, a year on from Mansion House, enthusiasm is hardly overwhelming. Only seven out of 11 signatories said their clients supported increasing investment in unlisted equities.
The main problem is not regulations, although some funds want tweaks to the rules governing long-term asset funds (LTAF), the open-ended funds created in 2021 to facilitate investment in illiquid assets.
A bigger issue is fees. For long term investors, private assets offer diversification and an illiquidity premium that promises higher returns. But costs tend to be higher because assets are typically less mature, harder to replicate and more reliant on active management than the public market equivalents.
Aegon’s allocation to private equity is expected gradually to add about 0.04 percentage points of additional expenses, although the current investment fee of 0.13 per cent will not change.
Scale is needed to help with liquidity, diversification and costs. The Australian occupation schemes, often viewed as an exemplar, joined forces to create an investment vehicle IFM to invest in private markets.
The UK’s effort is too fragmented — although Schroders’ chief executive Peter Harrison suggests the market will end up with just a small handful of vehicles doing DC private asset investment.
Keeping a lid on costs will be important for this market to take off. But so will be a recognition of the difference between price and value by fee-focused employers and consultants.