The barriers to investing in private markets are coming down, new DCIF research reveals

DC schemes are becoming more comfortable investing in private markets, with the majority of large pension schemes and master trusts having made an allocation already (42%) or planning to in the near future (28%), according to new research by independent consultant Elena Zhmurova for the DC Investment Forum (DCIF). The research is available to download here: https://dcif.co.uk/wp-content/uploads/2024/03/Investing-in-private-markets-part-one-FINAL.pdf

Improving risk adjusted returns for members is the main reason schemes wish to invest in private markets, with 100% of survey respondents saying this was a very important motivation. Improving diversification was also very important for 69%.

Schemes wish to access the full universe of private market opportunities, with private equity and private debt proving to be the most popular asset classes, with infrastructure and impact solutions close behind.

Long Term Asset Funds (LTAFs) were the vehicle of choice for 61% of survey respondents. Some master trusts are already invested in LTAFs, while several are in the process of setting up bespoke LTAFs. Others, particularly very large master trusts, see LTAFs as a step along the road, with co-investment their ultimate goal.

While the overall picture is encouraging, some barriers to investing in private markets still exist. High fees proved a barrier for 68% of respondents, with a lack of available products cited by 58%.

The fact that so many large pension schemes are already investing in private markets shows that neither barrier is insurmountable. Private markets tend to be a relatively more costly area of the investment universe to access, because of the additional research necessary to identify the right opportunities, engage with underlying companies and monitor performance. However, the returns and additional diversification benefits should justify the higher cost.

DC schemes are accessing private markets through a variety of routes. This disparity could explain the lack of available products. Asset managers will only build funds and platforms will onboard them where there is clear appetite.

Mark Austin, chair of the DCIF, said: “This research is really encouraging, showing us that the barriers to accessing private markets are eroding. As DC schemes grow and consolidate, access routes are likely to mature and converge, giving more members an opportunity to benefit from a wider range of asset classes.

“That said, the research shows that we still have some way to go to overcome the barriers schemes experience when investing in private markets. In order to overcome these barriers, it would be beneficial for the industry and pension schemes to come together and collaborate on what best practice looks like moving forward.”