Opening up private market investments for employees

Private market assets offer diversification and the potential to access longer-term growth opportunities 

Private markets have been in the spotlight following the Government’s announcement of an exciting initiative which is helping encourage investment.  

The ‘Mansion House Compact’, unveiled last summer, aims to contribute to economic growth and boost people’s pension pots. UK pension providers have committed to target investing 5% of their default funds in what are known as ‘illiquid’ assets where it is in the best interest of savers. 

Private market assets fall into this category – they’re ‘illiquid’ because they’re not as quick and easy to sell out of as many other types of investment.  

Being a founding signatory to the Compact, we can see the long-term potential of private market assets to diversify pension investments. 

Adding them to pension funds will take careful consideration, though, not least because they’re more expensive than other investments. There are also governance and operational challenges to be thought through.  

That said, we think private markets offer some great opportunities to access the types of investments not previously available to members of DC pensions. 

What has really helped in this respect is the introduction of a new type of fund called a Long-Term Asset Fund, or LTAF for short. LTAFs enable DC pensions to invest in long-term, illiquid assets, like private markets for the first time. They also have certain safeguards and strong disclosure and governance.  

We’re currently working hard to assess the best way to add some private market assets to the mix in our workplace pension for the benefit of members, while ensuring we continue to offer value for money. 

What do we mean by private market assets? 

Private market assets are not listed on financial markets, like equities and bonds are. You directly invest in, or lend to, a company or project. There are various types, ranging from private equity and private debt through to private infrastructure and private real estate. Investing in this way typically helps finance a new company’s growth so investors get in on the ground floor. Or it might involve contributing capital for new schools, toll bridges or port infrastructure, for example.  

The benefits  

Private market assets provide diversification and the potential to access attractive longer-term growth opportunities. A pension pot is typically spread across a range of investment types such as equities, bonds and property, spreading risk and increasing the potential for better longer-term returns. Private market assets behave differently and have different attributes to listed assets, offering new sources of return.  

The drive to net zero is a great example. It offers a huge opportunity for private markets to create value through things such as infrastructure projects and fledgling businesses delivering climate solutions, including renewable energy, low-carbon buildings, and energy-efficient technologies. So many of these opportunities are just not found in the listed sector. 

Some private market assets are attractive for their growth potential, particularly private equity. Others offer potential inflation protection. Some private market assets open up the door to projects with measurable environmental or social benefits as well as financial return potential – otherwise known as impact investing. Sometimes, investors can influence how these investments are managed to have a direct influence on responsible outcomes.  

Things we need to consider 

You may be wondering why we’ve not invested in private markets before. Well, the first LTAF was only launched last year and there are several factors we need to carefully consider before jumping in, such as the fact these investments can be at the riskier end of the spectrum due to their illiquid nature. 

We’ll be ensuring we get the mix right by investing across an attractive spread of companies and projects, managing risks carefully, and investing in the right way. This will be crucial.  

After all, improving retirement outcomes is ultimately what it’s all about. Watch this space.