Defined contribution (DC) schemes in the UK, especially master trusts and large single-employer pension funds, are increasingly interested in private markets investment, with a majority accessing such market via Long-Term Asset Funds (LTAFs), according to a survey conducted by the Defined Contribution Investment Forum (DCIF).
DCIF examined the attitudes of 11 master trusts and 10 single employer trusts towards investing in private markets. it found that 42% of those interviewed already invest in illiquid asset classes, and 28% are actively planning to do so. Only 9% said they are not planning on doing so in the next three to five years.
Among those investing, or planning to invest, in private markets, the majority are favouring private equity (32%), followed by private debt (25%) and infrastructure (20%).
Those who are already accessing private markets are doing so in variety of ways. The largest master trusts are interested in co-investment over the long-term “because of the freedom It gives them to access different asset classes, the lower costs and flexibility”, stated DCIF’s report on the survey.
Some master trusts are already investing in LTAFs and several are in the process of setting up a bespoke LTAF.
According to the report – Investing in private markets: The barriers are coming down – this option gives master trusts the chance to invest in private markets flexibly and with control over asset allocation, while outsourcing some governance aspects to the provider.
It added that there are several advantages to investing in LTAFs: outsourced governance, an opportunity to build familiarity with private markets investing, and access to new and different sources of return.
DCIF added that others see LTAFs as a step along the road towards co-investment. It pointed out that a couple of master trusts are considering investing in an LTAF outside their usual platform, where that platform cannot accommodate a semi-liquid element.
In fact, if there were no constraints available, the majority of respondents said they would prefer to access illiquids via an LTAF (61%), with co-investment being a favourite route only for 16% of respondents.
However, the main barrier to investing in private markets, highlighted by respondents, are high fees (68%), lack of products available (58%) such as an LTAF and multi-asset solutions in the market.
Survey results also showed that 58% of respondents said they might consider paying higher fees if a solution delivered more value for money, while 16% said they would be willing to pay higher fees if it delivered value for money.
On a positive note, the report pointed out that as the UK DC market gathers scale, the barriers to investing in private markets are being “steadily eroded”.
It added that a couple of the master trusts that have already started investing in private markets, or are imminently set to make an allocation, see the barriers as negligible or non-existent.
Existing LTAFs
Yesterday, the HSBC Bank Pension Scheme committed to incorporating private markets into its DC default investment strategies by partnering with Fulcrum Asset Management to create a bespoke multi-asset private markets LTAF.
This, according to LCP, marked a successful launch of the “largest LTAF” for a single trust scheme.
Before that, Schroders launched the UK’s first private markets LTAF in March 2023 focusing on providing opportunities for UK pensioners paying into DC schemes to access a myriad of opportunities across Schroders’ private asset investment expertise.
LIFTS
In the UK’s Spring Budget earlier this month Jeremy Hunt, chancellor of the exchequer, announced that the British Business Bank would award £150m to Schroders to invest into UK science and tech companies, and £100m to Intermediate Capital Group (ICG) to invest into the UK’s most innovative life science companies, under the Long-Term Investment for Technology and Science (LIFTS) initiative.
The LIFTS initiative will aim to create two new investment vehicles that are accessible to pension fund capital.
The award from British Business Bank will be matched by pensions capital from Phoenix Group and the chancellor expects this will generate “over a billion of pounds” of investment into UK science and technology companies.
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