The headline in today’s FT reminds me that I will be seeing Toby Nangle speak again at lunchtime. Toby now writes for the FT and he understands better than anyone (but Ludovic Phallipou ) what a waste of money most fund of fund private market funds are.

Toby’s argument, like Ludovic’s, is that accessing private markets for small pension schemes is just too expensive. I am not sure how many clients of wealth managers can count themselves as this rich, but Toby argues that you need to invest in billions not millions to bring the true cost of private market investment to reasonable levels.

Get it wrong (using fund of fund structures) and you end in the elliptical circle paying 3-5% pa for your management. If you can invest directly, you can see your costs falling below 1% whether you invest in real estate, infrastructure, private credit or private equity.

It is likely that specialist funds can produce more by way of gross return (due to the expertise of the managers) but what dribbles down to the kind of pensions who are getting stuck in to these FoFs is rather less than the very best pension funds who invest directly.

That is why Nest has spent £10bn of its member’s money  getting 10% of Australian infrastructure manager IMF and it’s why the best of the LGPS pools he was talking to last week, are investing directly in markets they find and negotiate with.

The net return to large pensions (investing in billions rather than millions and certainly thousands) is evident. It is most certain not worth using funds of funds when  investing  in private equity because of the costs. It has been even move disastrous to be in fund of funds when in real in real estate.

Here is the problem for the wealth managers. They simply can’t get the costs down. Unlikely Nest and USS and LGPS, they are caught in fund of fund structures which look good on a “gross” return chart but which offer less than than direct investment after costs have adjusted net returns.

There was promise LTAFs would be generally  available and make private investment accessible to a wider market,  but to date there are few on the market. Those which have come to market are fund of funds and run into  the cost  described by Nangle and chronicled by CEM and the Norwegian Finance Ministry (who run the large fund in the world). Recently they have been allowed as a means of giving the wealthy (who have to sign disclaimer re risks) access to private markets. The FT explains

LTAFs are a type of “evergreen” semi-liquid fund offering a mixture of private assets, which can be harder to sell quickly, and those that are easier to offload, such as money market funds or listed equities. In the UK, the Investment Association devised the structure in consultation with industry experts, following similar moves in Europe.

However, the new vehicle has been slow to catch on. There are 23 approved LTAFs in the UK, according to the Financial Conduct Authority.

In Europe, there are more than 150 of the equivalent product, according to Morningstar Direct. Financial advisers in Europe were more familiar with the product, meaning uptake among savers was ahead of the UK, some of the private capital firms said.

Maybe the Europeans are able to invest directly and avoid fund of funds put I doubt it. I suspect investment consultants and pension trustees  are finding VFM from LTAF fund of funds hard to find. I suspect that while there is much talk of penetrating wealth, the amount of money flowing into LTAFs from the wealthy will be limited (and for good reason). Wealth managers will have new ways to access huge pools and that won’t be easy for them, their bespoke strategies for the wealthy do not leave them much scope to pool! Wealthy have to have clear evidence that the funds they are being offer work for individual, they may blanche when they see the contribution sizes in the institutional markets pension work in.

Private market managers need substantial investments to bring their costs down. They go to where the cost of distribution are not preventing profit and the due diligence of wealth manager may prevent “gearing up” converting into “sales”.

I think it more likely that the large private managers are looking to sell into private markets where they are not confronted by VFM and the consumer duty. But purchasers at the largest pensions schemes are avoiding fund managers and going straight to the investment opportunities, this is not something that wealth can do efficiently.

The consolidation of smaller pension schemes into the bigger ones who can make direct investments is going ahead and I welcome it. It squeezes out poor purchasing through weak procurement meaning that savers only get to benefit from the best features of the private markets.

It would be ironic if  the small men and women could access the best of private markets by investing collectively while their wealthy counterparts couldn’t as they follow unique portfolios!

Maybe I well conclude, when I listen to Nangle and others this afternoon, that I am better off being small but part of huge collective arrangement. I like this state of collective wealth rather  than being rich myself with my wealth managed individually!