Private market investments deliver ‘little’ additional value at current fee levels

As the UK government encourages pension schemes to invest in private markets in a drive to boost the national economy, The People’s Pension has explored various ways to reduce fees. However, a recent report by the master trust suggests that investing 10% of all projected assets in private markets via external managers by 2030 could cost schemes, and savers, as much as £1.5bn (€1.8bn) per year in fees.

It suggested that bringing fund selection and management in house and using successful co-investment programmes could reduce total costs by more than 60%, or nearly £1bn.

However, the £32bn master trust warned that the calculations are based on aggregate master trust assets.

It added that while the largest trusts are growing rapidly, no individual trust currently has the economies of scale to deliver the largely internalised approach to investing in private markets that the report outlines.

The People’s Pension said there are other options that master trusts could potentially explore, which would enable them to invest in private markets, while the industry is expected to focus on consolidation in the next few years.

The report said that it would “make sense” for funds to partner in building capacity in the form of a sector-aligned private markets unit if this were feasible. In the absence of such alignment, fully-agile internal management should still be the goal, and there is a path to this endpoint that the largest master trusts can take.

This could be built initially with the capacity to select and manage externally managed private market funds exposure, and in doing so accrue the expertise necessary to source, conduct effective due diligence, and construct a diversified portfolio of co-investments in portfolio companies/transactions in one or more private market areas.

It suggested that a good place to start could be for an existing pension fund or pool with internal management capabilities and strong governance to step up into the role of a not-for-profit sector-aligned private market aggregator.

It pointed out that the Universities Superannuation Scheme (USS), The Pension Protection Fund, or Local Pension Partnership Investments (LPPI) all stand out as good aggregator candidates.

If starting from scratch, The People’s Pension said there are dangers in trying to do too much too quickly. It explained that origination and management of private assets is difficult and requires significant resourcing and expertise. However, it said that CEM Benchmarking shows that open-ended/evergreen structures in private credit, real estate, and core infrastructure offer quick routes to invest assets at less egregious costs.

It said: “The challenge is significant. But the prize – close to a billion pounds a year in member savings by 2030, and better pension outcomes for millions of members – is worth the effort.”

Dan Mikulskis, chief investment officer at People’s Partnership, provider of The People’s Pension, said that private markets can contain exciting long-term investment opportunities for millions of pension savers, but too often the advantages are reduced or cancelled out entirely because arrangements are such that asset managers take most of the benefits through high fees.

“As this report states, the best value approach to investing in private markets is for larger funds to develop appropriate skills and scale to access private markets investments in optimal ways – this might be through direct ownership, co-investment and not just through funds,” he said.

The People’s Pension has recently outlined its intention to start investing in private markets and is currently in the process of hiring investment team members.

Earlier this week, The People’s Pension appointed People’s Investment Limited (PIL) as the primary investment adviser to the trustee of the master trust – bringing in an in-house team producing investment advice and overseeing the assets.

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