Willis Towers Watson has launched a working group that will explore the potential for a new type of passive, or beta, offering within private equity that would allow a wider range of asset owners to access and hold such investments.
In a new paper, the consultancy said that although there were structural tailwinds to support the continuing rise of private equity in institutional portfolios, the industry needed to evolve to fully capture its growth potential.
Andrew Brown, head of private equity research at Willis Towers Watson, said the current model in private equity had performed well over the past few decades, but “we are increasingly seeing capital moving away from defined benefit pension schemes into defined contribution (DC), so there is a need to innovate in order to identify a structure that enables a wider investor base to access opportunities”.
“This could mean relooking entirely at the way that some private equity funds are structured,” he added.
High fee levels remain one of the key barriers hindering private equity’s expansion into the DC pension market, WTW noted in its report.
The consultancy also said that under the current structure, private equity managers were often under pressure to sell out of strong performers prematurely to facilitate further fundraising.
Brown said long-dated funds and evergreen structures could be a way of mitigating the need to do so.
“This could facilitate the creation of a ‘buy and maintain’ private equity that may better suit an investor with a longer-term investment horizon,” he said.
The new WTW working group was established in March, and brings together expertise from the consultancy’s public and private equity investment research teams.
In its report, the consultancy said it was seeing more and more public equity managers extending their reach to private equity and that “we could potentially see the rise of a new breed of investment managers executing investment strategies across the entire equity spectrum”.
The working group would actively search for and evaluate opportunities in this area, it said.
In the UK, fast-growing DC scheme NEST is looking to add private equity to its asset class stable, but CIO Mark Fawcett has said it is challenging managers to come up with a fee model that does not involve carried interest.