We learn these things through analytics and then experience. I learned the argument for the a movement away from PE funds to direct investment at an LGPS conference over   two years ago when Toby Nangle told the new bigger funds to make the use of their funds

Toby with Emma Douglas in the summer of 2024

Toby argued that LGPS funds were already pushing their heads through the constraints they’d had and seeing the opportunity of direct investment in private equities

To use the language of today, consolidation of funds leads to value for money as big funds can do the same things as smaller funds , but more efficiently

The answer is what Toby calls “value add” and what we call improved value for money. This is what the sadly deceased Chris Sier found through Clear Glass and it’s what is happening in America as reported by the FT this weekend.

Institutional investors are increasingly investing directly in companies alongside private equity firms, rather than committing capital to funds that leave investment decisions up to asset managers.

We know of private equity funds as LTAFs and they’re the way that smaller master trusts can get access to private markets. They just aren’t as good an investment as the underlying assets can produce if held directly. That’s because of fees and it’s why bigger schemes – especially Nest won’t pay funds huge amounts  including performance fees.

In the USA the movement to direct investment is marked

The FT asks a question that seems fairly obvious to anyone who’s been in business, why pay a middleman when you can do it yourself

Unlike traditional private equity funds, where investors typically pay a 2 per cent management fee and 20 per cent of investment profits as carried interest, co-investments come with little or no management fee and carry.

This is not an argument for private over public equities, that’s for another blog or five. It’s a recognition that collective pensions find it much easier to hold direct investments in private assets  because they don’t have the need for liquidity and don’t have to run a range of strategies for people to choose from are better suited to investment into private equity.

The fundamental argument for direct investment or co-investment is that it adds to the growth in the pension fund not the private equity’s fund managers wallet.

The $86bn Pennsylvania Public School Employees’ Retirement System estimates its co-investments have outperformed its overall private equity portfolio by about five to six percentage points, thanks largely to savings on management fees and carried interest.

This is a re-statement of Toby Nangle’s argument two years ago and I sense that progressive funds in DB and in larger DC funds are already earning pensioners and sponsors  rewards.

Of course there are problems with any form of investment that involves dealing with the financial whizz-kids who operate the half-way house , know as co-investment and even direct investment has perils with the price paid and the valuation process when selling.

The second half of the FT article – free link here – explain the perils.

We have in organisations like Border to Coast and Nest, examples to follow.   I hope that lessons from £100bn + funds are learned by smaller funds. There are answers in collaboration that are waiting for them.