The approach of defined contribution (DC) pension schemes towards private markets has been a big topic of debate for some time. But for Eric Deram, managing partner and CEO of Flexstone Partners, who manage $11bn (£8.5bn), the approach of some DC pensions towards private markets is something on an anomaly.
“I find it fascinating that the allocations from DC pension funds in the UK to private assets, and private equity in particular, are so low. It just doesn’t make any sense to me,” he said.
In fact, there has been, Deram added, push back on private markets from some DC pension funds. “But if you look around the world and work through the issues, you will find perfectly viable solutions to any problems and challenges,” he said.
Deram then cited the example of a Flexstone client: the Australian superannuation fund Hostplus. “Their allocation to illiquids is 40%. It is a DC master trust.”
The opportunities within private markets, given the millions of private companies, “are enormous”, Deram added. “It is silly not to tap into this investment opportunity.”
He then turned to the issue of cost, as this is cited by some DC pension funds as the reason for not going down the private markets route. “You can,” he added, “invest in private equity at a decent cost. It will always be quite an expensive asset class for a variety of reasons.”
But he also noted: “There are ways to reduce the cost quite substantially: using secondaries and using co-investments, which, if you manage 50% primary and 50% co-investments you in effect reduce your cost basically by 50%.”
Deram then turned to the importance of evergreen funds. “We have started to see evergreen, or open ended, or however you want to call them, develop over the last 15 years or so in illiquid markets. The obvious one is real estate,” he said. “In private equity, there has been one that has been around for about 10 to 12 years which is about $15bn (£11.6bn) in assets under management.”
These structures, Deram noted, are useful for a variety of reasons. “First, it is important for the [pension] members to know what they are investing in. And the democratisation of private assets, and private equity in general, via those evergreen structures, helps in that way,” he said.
The other thing that helps DC pensions is it assists having a daily price, Deram added. “All the plumbing you need to build around the difficulties of private equity, and the daily pricing have been set by the evergreen fund to deliver that daily pricing.”
Another issue is about liquidity, Deram said. “It is dangerous to say those evergreen funds are liquid. This is an illiquid asset class. And it creates time to create value,” he added.
Nevertheless, he also noted that these structures have built-in liquidity facilities, or redemption options, on a quarterly basis. “That certainly could help DC pensions investing in private assets. But I don’t think it is necessary, if you have built your programme well,” Deram said.
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