PLSA IC 19: Private market DC scheme investments could produce higher returns

Investment in private markets and careful planning could increase defined contribution pension scheme investment returns by 15 per cent.

Speaking at the Pensions and Lifetime Savings Association 2019 Investment Conference, Partners Group co-head, portfolio management, Roberto Cagnati said: “If you run private markets at 20 per cent during a growth phase, then you slowly transition to a lower allocation, even beyond the retirement age.

“Using all median average numbers, average income, average contribution rates, and running it over the last 45 years, an average allocation gets your monthly income at retirement from about £1,300 to roughly £1,500, so you get a 15 per cent higher payout.”

Cagnati argued that DC schemes should consider investing in private markets as they have broader access to information and management “through in-depth due diligence process”.

Furthermore, he claimed that private market investments provided improved governance and it creates an operational long-term focus “through operational and strategic initiatives without the pressures of quarterly earnings targets of public markets”.

Cagnati also stated that private equity investors are usually about to sell their portfolio companies in more favourable exit environments.

However, he admitted that it wasn't as simple as just investing. Precautions should be taken before any big investment decisions and there are some issues that investors would need to overcome.

He added: “It needs to be very diversified on an individual positional level across asset classes. You need daily trading, single price and you need it to fully bed in.

“Needless to say there will need to be gating features if a really big part of your portfolio is invested in five to seven-year investments in terms of holding period.

“You can't sell the fund in a day so there needs to be limitations but also some considerable thought on how to grow the fund.

“On the cost side, while having a higher overall level, you clearly need things like a TER cap on the overall fund because you can't have things like performance fees that, in a very strong year, might increase the cost of the fund, and could create trouble fitting the overall charge cap.”

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