Navigating the complexities of private market investing

How workplace pensions can make private market investing work for them.

Private markets are rapidly becoming a hot topic in the workplace pensions world. In the past, access was limited to asset owners like Defined Benefit schemes, Sovereign wealth funds, Endowments and wealthy individuals. But that’s changing, with barriers being taken down, opening the door to private markets, and offering new ways to grow savings, build stronger retirement outcomes and opportunities to create member connections through tangible assets. 

That was the hot topic of discussion, led by our Head of Investment Solutions, Mithesh Varsani, at our latest event for EBC and scheme advisers who wanted to find out more ahead of our move into offering private market investments as part of our default workplace pension offerings later this year. 

Bringing his pioneering track record of delivering private market solutions for the DC market –from the first Long Term Asset Fund to closed-ended Limited Partnerships – Mithesh joined us this year bringing a solutions mindset focused on customer outcomes. He made what can be a complicated subject easier to understand for everyone – and not just the DC experts in the audience.  

He outlined the potential benefits for members and their retirement outcomes, and explained the intricacies of allocating to private markets.
 

What are private markets?

Private markets encompass a range of asset types distinct from traditional public markets, including private equity, venture capital, infrastructure, private credit, real estate, and natural capital. They can support innovative start-up business to scale, giving pension scheme members exposure to new and growing companies not found on listed markets.   

They can be sourced and accessed via a variety of ways, ranging from investing in primary closed-ended funds and acquiring secondary stakes, to engaging in co-investments and making direct investments.

Potential benefits

What private markets offer is access to a broader range of asset classes that are part of economic activity. It provides diversification and potential access to attractive longer-term growth opportunities for taking on the illiquidity. They can offer resilient, long-term inflation-linked income streams through real assets. And they can deliver tangible environmental, social and governance (ESG) benefits through direct investment into opportunities like renewable energy, natural capital and biotech.

Addressing the complexity challenge

But when it comes to investing in private markets it’s clear to us that one size doesn’t fit all. Not only do different types of private market assets behave very differently, but they also perform differently depending on where they are in their lifecycles. 

Their complexity, providing unique challenges in terms of access, liquidity, valuation and oversight, needs to be navigated carefully amongst the ability to source private asset opportunities. There are lots of choices and considerations around the operational and investment implementation demanding specialised expertise in a variety of areas. 

There are different types of partners which can support you in harvesting private market exposure. With private markets the key word is ‘private’, so you need the right partnerships to source the best deals and access to regular deal flow by local market experts. But it’s not just about who you know, it’s also what those third parties bring to the table, their track record and relationships to ensure they’re able to participate in opportunities that are high in demand.  

Given all these considerations, we’ve been taking our time to ensure we deliver a measured, future-proofed private markets proposition for our workplace pensions clients. 

While we could have a very quick to market solution with an off the shelf product, we’ve taken time to develop bespoke structure that allows us the flexibility to invest in the right types of assets at the right times in their lifecycles and work with the right partners to access the best opportunities and manage risks in a transparent fashion.  We’ll be offering three different default options for employers to choose how much, if any, private market investments they want. 

Not having our own in-house fund managers gives us a true open architecture approach to source fund managers for the different asset classes and opportunities where they are. We’re initially working with two fund manager partners and, as well as being experts in sourcing deals through networks and origination, our partners need to efficiently deploy the investments in our funds with a focus on portfolio construction and cashflows to support ongoing liquidity management, particularly during the later life period of member journeys.  

This has led us to design and sponsor our own Long-Term Asset Funds (LTAFs) with bespoke, open-architecture mandates for maximum flexibility to access the full spectrum of private market investments.  

We can also uniquely tap into the significant capability of our parent company, Lloyds Banking Group, in originating and deploying capital and managing UK-based private market assets, too, bringing home-grown opportunities to our pension members not found anywhere else, with the added bonus of cost advantages.  

With pension adequacy firmly in everyone’s sights, there’s no doubt that investing in private markets can play a crucial role in pension fund portfolios. Yes, it does require a thoughtful approach that balances opportunity with risk, disciplined execution, strong partnerships, and a long-term perspective – with members’ best interests front of mind. 

We’ll cover the next EBC and adviser event ‘Digital done different’ in August.