Can private markets improve DC outcomes? – We must trust our Trustees.

Private market investments are dark horses. We can see they make people rich but so far, those riches have not been shared with people saving for their own retirement. Lee Hollingsworth asks the reasonable question, why is private equity so expensive” and I guess the answer is that it costs a lot to run a company.

Should it? Do we pay executives too much, do the private equity investors who take positions on the board demand too much by way of dividends and debt interest of the companies they invest in. Is there an equitable relationship between all the stakeholders or are the private equity boys (and girls) taking the p***?  Which I think is what most of us think when trying to answer Lee’s question.

If I’m being asked to pay high fees (including performance related fees) to a private equity manager for a piece of the action, I want to know that I’m getting a fair bit of the action, I do not expect (for instance) to buy equity at a price that turns out to be totally unachievable to anyone else but me!

But that is what I fear when investing in a private market – unless I am totally sure of the basis of valuation. If I invest in a publicly quoted stock, I know that I can match my expectation of price (quoted) with a buyer at roughly that price. But with private equity , there is no such surety.

This is made all too clear by David Fairs on the Pensions Regulator’s blog.

Valuation of some illiquids can be challenging, even in benign markets, and the process can often be more of an art than a science for some illiquids.

In current markets and other incidences of stressed markets, with volatile investor sentiment, transaction activity drying up, and significant uncertainty around some key valuation inputs, valuation of some illiquids may be impossible.

For others, it may be little more than a conditional best guess. While many of the underlying illiquid assets may eventually come out the other side of the period of economic and market challenge and deliver the long-term value and outcome expected, the valuation of those assets along the journey can be problematic for trustees.

For those of us used to hearing criticism of opacity and illiquidity in pensions (Woodford, LDI, with-profits etc.) , the prospect of not knowing what our workplace pension is worth is not encouraging. If I invest £250,000 of my savings into a fund only to be told that 10% of the fund was over-valued and has just been re-stated at half its notional sales tag, then I am down £5,000 and there is nothing I can do about it.

My suspicion is that very few private equity sales are realised at under market valuation. The market dynamics are such that private equity is and is likely to remain the dominant asset class that DC savers cannot stomach.

For a good discussion of these market dynamics – watch this

The truth is that none of us would want to put our heads in the lion’s mouth of a private equity firm unless we had a lion-tamer by our side. The lion-tamer in question ought to be our trustee or personal pension default provider. I would expect that any investment made on my behalf was made because there was a reasonable expectation that for risk take, that investment would give me a better outcome. My trustee would have a CIO, so would the personal pension, the personal pension would have an IGC or GAA watching over it.

But even with these safeguards, I am not certain that the CIO or trustee or IGC/GAA can really know what is going on at the investment coal face. Between them and the management of the company they buy into is the investment platform, the fund manager and then the private equity manager – all of whom are charging and spinning their particular tale.

These layers of the onion (intermediation to use the posh word) all make it harder for me to know what is going on with the management of the company I am paying for.

As David Fairs tells us

The true market value of an illiquid asset can only be established on sale. However, trustees will need valuations on many different dates, as members join, leave, transfer to other options within the scheme or externally, and die at different dates.

In practice, trustees need to be able to settle members accounts, offer valuations and allocate fees and investment performance to member accounts.

Where performance-related fees are involved the challenges for trustees increase and where the valuations of illiquids lag the market and are artificially high (from not being realistically ‘marked to market’), VFM concerns arise as members pay fees based on the artificially high value attributed to those investments.

David goes on to list the things trustees and their investment executive can do to make sure that private equity does not do an LDI style blow up and threaten the trustee’s capacity to meet saver’s reasonable requests.

TPR gives the following guidance

  • ensure that rigorous valuation governance processes are in place and the proposed valuation data points meet the administration requirements for their scheme
  • obtain appropriate advice from their investment adviser and their legal adviser and also, potentially consult their scheme auditor
  • understand the difference between the use of stale and modelled prices and in which circumstance either may be acceptable or necessary
  • undertake some member movement scenario analysis to understand the practical implications in relation to valuations and attribution of fees and performance
  • undertake some downside valuation scenario analysis to understand the operational issues that would arise, in stressed markets or when (fund) assets invested in are subject to, for example, an audit qualification

But can DC trustees reasonably be expected to get access to the information needed to complete due diligence.

Are they not dependent on their investment consultants, their platform managers who reinsure the funds, the fund managers and indeed the private equity managers?

In my view, direct access to private equity managers is needed- if trustees are to tell members a) that members can expect value for their money and b) that the trustees can satisfy themselves that they are not going to get caught short by a liquidity crunch.

The role of a private equity fund manager, which I assume is what Franklin Templeton aims to be , is to give access to institutional investors to what is really going on at the asset level and to ensure that the portfolio of investments is managed to the needs of the asset owner (the trustee or in the case of personal pensions, the manager of the default investment fund and its IGC).

That is the challenge we should be making to any intermediary standing between us and the assets on which our financial futures depend.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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