Making private markets work for DC: the J-curve and beyond

The Mansion House reforms and the Pension Schemes Bill in the UK have accelerated an important debate about the role of private markets in defined contribution (DC) pensions. There is broad industry agreement that DC members should be able to access the long-term growth, diversification and real economy investment opportunities that private markets can offer.

The real challenge isn’t whether private markets belong in DC portfolios, but how a DC scheme can establish its private market allocation in a way that is fair, operationally robust and of genuine benefit for today’s as well as future member cohorts. At the heart of that challenge sits a concept well known to institutional investors but less familiar to many DC stakeholders: the J-curve.

The J-curve describes the typical pattern of returns from private market investments. In early years, funds tend to experience cash outflows as capital is deployed and assets developed. Costs are incurred upfront, valuations remain conservative and performance may appear weak before assets mature and begin generating returns.

In a defined benefit (DB) environment, this is manageable. In DC, it’s more complex – and particularly challenging at the current point in time when schemes need to establish a private markets allocation for the first time. DC schemes are daily dealing environments built around individual member accounts, with members joining, leaving, transferring, retiring and switching investments continuously. Any private market solution must therefore work fairly for investors entering and exiting the fund on different days, not just for a single cohort investing over decades. The J-curve is, therefore, not simply an investment concept; it’s a member outcomes and governance challenge.

Why the J-curve matters more in DC

The J-curve creates two distinct risks for DC schemes.

The first is slow deployment. Traditional private market funds draw capital gradually over a number of years as opportunities are sourced, evaluated and acquired. For DC members, this creates a potential mismatch: members approaching retirement today or moving into a lower-risk strategy may never experience the benefits of the private market allocation if capital is still being deployed years later. In effect, one generation of members bears the waiting period while another benefits from the resulting returns.

The second challenge is valuation drag. Private market investments often incur upfront costs while assets remain conservatively valued until income generation or project development progresses sufficiently to justify higher valuations. Early investors can therefore see muted or negative returns before the underlying investment thesis starts to materialise.

Both problems matter most and raise important questions around fairness when private markets are being built up from a low or zero starting point: today’s members can’t be asked to absorb implementation costs and early-stage deployment burden while later investors inherit a mature allocation and participate primarily in the upside. Trustees and governance bodies should therefore view the J-curve not solely as a performance issue, but as a fair treatment of customers’ issue.

What solving the J-curve looks like

The J-curve isn’t insurmountable – but addressing it requires portfolio construction designed specifically for DC, not adapted from traditional institutional models, and a sequencing approach that focuses on build up vintage diversification from day one. Rather than relying solely on newly launched private market investments, investors can blend exposure across assets and vehicles at different stages of maturity. Established evergreen funds, which already contain deployed capital and income-generating assets, will help at the early stage when the private market allocation is being established initially, because they can provide day-one exposure to seasoned investments. This helps ensure that current members don’t bear all the early-stage costs.

Infrastructure and clean energy strategies, for instance, can be accessed through funds that have already completed several years of sourcing, due diligence and deployment, meaning investors inherit existing assets rather than starting from zero. Income-generating real estate and private credit assets can similarly provide immediate exposure and cash flow characteristics that help offset slower deployment profiles elsewhere in the portfolio.

Valuation methodology is equally important. Daily dealing structures require pricing approaches capable of reflecting new information accurately and promptly, with costs, gains and changes in underlying asset values shared fairly between members entering and exiting at different times. Trustees and independent governance committees should scrutinise how pricing is determined, how costs are allocated and whether valuation frameworks adequately support equitable member outcomes.

Once the portfolio is established, implementation can move on, but scale also matters. Larger portfolios are better positioned to combine diversified exposure across sectors, geographies and vintages while retaining the flexibility to access more specialised opportunities as they emerge. Once a portfolio has scale, diversified vintage exposure and resolved deployment challenges, it can move beyond mostly evergreen structures toward direct investments, co-investments and partnerships that improve outcomes and give closer access to underlying assets.

From access to outcomes

Private markets access is rapidly becoming a policy expectation for UK DC schemes. But policy ambition alone does not solve implementation challenges. The J-curve provides a useful lens through which trustees, consultants and governance bodies can assess competing approaches for the initial deployment of DC member investments – distinguishing solutions genuinely engineered for DC from those adapted from traditional institutional models.

The next chapter of the DC private markets story isn’t about access – that question has largely been answered. The focus now is on outcomes. The providers that succeed will be those that can demonstrate not only that members have access to private markets, but that those assets have been implemented fairly, efficiently and in a way that improves long-term retirement outcomes for all members.

Martin Dietz is head of diversified strategies at Legal & General (L&G)