Accessing private markets investments in DC

The roundtable – chaired by PP editor Jonathan Stapleton and held in association with L&G – explored the best practices for structuring private market solutions to suit the needs of DC savers.

The discussion also considered the opportunities available to DC savers by accessing this asset class – considering the diverse range of prospects that includes real estate, private credit and venture capital, in addition to private equity.

Jesal, L&G launched its private market access fund last year. How have you incorporated it into your target date fund?

Jesal Mistry (L&G): We looked at asset allocation and at different return drivers to provide better outcomes for members and asked how we can create a solution that gives as many people as possible access to a range of different private markets' assets. We learned from DB schemes, that have benefited from private markets for many years, as well as drawing on our DC experience to structure a solution that is suited to the needs of DC clients.

Our globally diversified fund focuses on responsible, sustainable investment. Importantly, the fund-of-funds structure allows us to access different opportunities quickly, deploy capital more effectively to drive better value, and to use liquidity within that fund structure in an efficient way.

It was also about taking some of the challenges away from clients who would normally be making asset allocation decisions. The governance for private markets is greater than public markets and whilt some clients have the structure and resources to do that with their advisors, many clients cannot which could mean that they miss out. So, by supporting individual clients, it makes it simple and straightforward to access lots of different investment solutions.

With this innovative fund structure, we were then able to incorporate an allocation to private markets into our defaults within the Master Trust and for our GPP clients, thus providing access to a wider range of investment opportunities for all DC clients and members.

What do DC clients want, and what sorts of roadblocks are they facing?

Stephen Budge (LCP): When schemes are considering private market investments, we tend to talk first and in more detail about, ‘How do we resolve access for DC?', rather than the investment case, given the known complexity of these types of assets.

Liquidity is not an issue because DC schemes are awash with liquidity in terms of cash flows. The sticking points tend to be more about getting confidence in the valuation process and pricing. Therefore, it comes back to getting that assurance on how we mitigate the risks of making it fair to all members.

The first investments in private markets tended to be towards the multi-assets, given the simplicity of that model, in that you are buying a fund that does it all for you. These solutions are able to take away a lot of the implementation-related risks and a lot of concerns. The interesting thing for us has been the speed of the interest and take-up of single asset class investments.

From a member outcomes point of view, we are moving forward at pace across the whole industry and are much more comfortable around exploring this area and making allocations. The only hesitation now is consolidation. For a single employer trust, you must be sure that you are going to be around for a foreseeable time for it to be worthwhile which is holding many back in terms of next steps.

Martin, what are your thoughts on structuring private market solutions for DC schemes?

Martin Dietz (L&G): There are some historic challenges to getting private markets into DC. This is where the LTAF has done a good amount of the legwork for us. There is now almost a rule book that gives us a path towards getting private markets into DC.

Liquidity is clearly a concern. There is lots of liquidity on the way for DC schemes, but there needs to be a solution for what happens if there is a sell-off, or any other problems with these private market building blocks. DC is very much focused on the single-tier pension and on standard, very scalable processes. If you throw in private market building blocks that can break that scalable model, we need an investment solution that also smoothes the operational problems.

The second problem is that we need to provide a daily price to the DC member, but private market assets are not priced as frequently. There needs to be a manual step introduced between the private market fund and the DC investor.

The third big challenge is performance fees, as well as standard fixed fees. People have convinced themselves that value for money is minimising the fees. There is a clear pushback against this going on right now, where some increase in fees is justified if there is quality of the assets there. We need to marry these two things up, with good assets and strong performance potential.

What about best practice in terms of structuring for DC?

Daniel Murphy (Goldman Sachs): The key thing is maintaining that flexibility. Valuation challenges, in terms of daily pricing, and liquidity challenges are some of the things that come into consideration in structuring a private markets programme.

There are some assets that are very naturally suited to these types of programmes, such as private credit or even real estate, where there is an income component that provides a natural form of liquidity flowing into the programme. It is about setting up risk boundaries that you are comfortable operating with and managing assets appropriately. That may involve shifting some of the more liquid parts of the portfolio to rebalance from a risk perspective, as assets may be concentrated on the riskier side of the illiquid side.

Over the last 20 years, investors have become more comfortable with taking on additional illiquidity and managing programmes across the total portfolio rather than in silos. That knowledge is now being imported into the DC space to understand how to better manage programmes there, and deal with that illiquid aspect of it, while not misshaping the entire portfolio.

Are there some asset classes that work better under certain structures than others?

Christopher Hopkins (L&G): There is a great opportunity for DC schemes in venture capital. Our big focus is on world-leading UK science; in the UK we have two out of the top five universities in the world, three of the top 10.

With some of the underlying assets of heavily intellectual property (IP)-backed companies, the volatility over long periods of time is lower, because rather than business models, you revert to the underlying value of the IP. Through exposure to a lot of companies, we have tried to construct something that works not just for our DC clients but also other institutional clients.

Within our portfolio we have Vaxxitek, the Oxford University Covid vaccine, and PQShield, a post-quantum cryptography company. We are also working on another deal now in applying AI around a particular area of heart failure.

These are real-world impacts that have really struck with our clients. It is not just any type of venture capital, it is heavily focused on intellectual property and science, making both returns and a social impact that cuts through.

How can private markets such as affordable housing help schemes make an impact beyond investments?

Ali Farrell (L&G): Affordable is delivering on both sides now. It's increasingly important to pension investors, and especially underlying pension members, who really care about what their capital is being invested in. Over the last 10 years, private capital has become an important part of how we drive and deliver more affordable housing in the country.

What's exciting and compelling is the social impact this asset class is making, bringing people into homes that give them stability and taking children out of temporary accommodation. There is a real measurable impact we can demonstrate to our customers and investors. It is an exciting time for affordable housing, with private capital coming in, and DC is the next step to flow that capital into the sector.

Stephen Budge: Thinking about long-term quality of outcomes is beyond just pension savings. Affordable housing is a real opportunity for closing the gap around the differences of retirement. There is increasing concern over how much of an impact renting in retirement has on pensioners. Sir Steve Webb has been leading some research in this area which is really helping to better understand this issue.

Jesal Mistry: Members tell us they want these tangible types of investments – things that they care about today like affordable housing and clean energy. There is also a debate raging on fiduciary duty which suggests that trustees and fiduciaries can consider the environment an individual lives in today or at retirement, alongside the growth of their pension pot, as part of the consideration of acting in the interests of members encouraging investment in local society and the economy.

Does infrastructure have a place in DC?

Deepa Bharadwaj (IFM Investors): The long-term nature of defined contribution (DC) investing aligns closely with the time horizon of infrastructure investments, making infrastructure a highly attractive asset class. Investing in open-ended infrastructure funds allows investors to achieve multiples on their invested capital. With the shift from defined benefit (DB) to DC schemes, members are increasingly responsible for their own retirement outcomes. This makes the ability to deliver compounded returns over time especially important.

To manage risk, we assess each asset and its revenue streams to ensure inflation protection, and we often explore opportunities for the asset to grow as a way to enhance resilience. This could include expanding its capacity, improving efficiency, or unlocking new sources of income. When it comes to long-term return stability, it's essential that members can rely on consistent performance over time. These are amongst the reasons the Australian Superannuation schemes, many of whom are IFM's owners, have been investing in infrastructure on behalf of their members for many years.

Infrastructure also has a strong connection to local communities. Investing in infrastructure for the long term fosters meaningful relationships with these communities and enhances the value of the assets through engagement. This is the real-world impact of infrastructure investing.

Daniel Murphy: Looking across the full spectrum of investable assets, from equity to fixed income to real assets, private infrastructure often offers a fundamentally different set of assets than are available in public markets. In private equity and public equity, fundamentally, you get a lot of the same beta exposures. Similarly, in credit, there are a lot of similar risk exposures.

With public infrastructure, the indices are heavily weighted towards traditional utilities – things that hook up to your house and that you are using on a daily basis. Private infrastructure can include those things but also include sustainable energy projects, digital infrastructure, logistics infrastructure, and the infrastructure powering today's economies. It is a fundamentally different set of risk exposures and a great diversifier for broad, multi-asset portfolios.

In terms of inflation protection, private infrastructure was the best performing asset class over the last four years across private markets.

Ensuring fair valuations has been tricky with DB schemes, is it similarly tricky for DC?

Martin Dietz: It is a qualitative process. In public markets, we have a daily price. It is very straightforward to pass that on to a DC member and to give them what is a fair price. On the private market side, that is not the case. Private market funds might value on a monthly or quarterly basis, but, even then, the valuations typically come out with a delay, so there is a need to bridge that gap. Our structures need to have the capability to pass these prices through that chain as quickly as possible, whenever a price is made available.

We need to stay aware of what is going on in the world and make sure that, if markets or the macro environment changes, we look at these assets and see if an adjustment is required.

Deepa Bharadwaj: We have a valuation policy that has been built over 30 years operating in the infrastructure sector. Each of the businesses we invest in are valued on a quarterly basis by independent valuers who are typically the big accounting firms. These valuers are rotated every three years to ensure continued independence. The valuations generated by the independent valuers are also reviewed annually by the fund auditor. So overall it's a very rigorous process with lots of checks and balances.

The infrastructure team is independent of the process, with a separate team running the selection process for valuers.

Christopher Hopkins: We follow Insurance and Pensions Commission guidelines very carefully and have quarterly valuation committees. We focus on the underlying business performance and how we tie that back to valuations, and we are particularly conservative on the valuation of our portfolio.

We are constantly evolving our own methodologies in line with market best practice. We spend quite a bit of time with our fund managers to make sure that we are both aligned on how we think about underlying fund performance, and more importantly, the underlying assets that comprise it.

Does the balance between fixed fees and performance fees cause practical issues?

Jesal Mistry: We are starting to see a real shift towards value over cost across the industry. Stopping the race to the bottom and looking more broadly at risk and return net of fees is incredibly important, particularly over the long term. That might also involve looking towards what is beneficial for members in terms of society and community. For example, looking at infrastructure, particularly if individuals can see the tangible benefits of it in the UK, we are seeing that acceptance of a limited higher fee.

Can investing in affordable housing engage your membership?

Ali Farrell: Yes, part of the beauty of affordable housing is that it is incredibly tangible, and people can come and visit the assets that they have invested in. We are finding that very powerful with trustees and those who have allocated to the fund already. It is a local passion around how we are building assets in those areas.

People are becoming more in control of their pension and becoming more engaged with how they want it to be allocated. When they can really link it to something that they care about or something that they can see, touch and feel, it really makes a difference with where they are directing their pension. It is a real shift for DC.

Deepa Bharadwaj: When we engage with all our investors, in terms of outcomes, we all agree that returns are the number one focus, but considering how those returns are delivered, sustainably and with regard for the community is critical. By reinvesting in the assets and committing to capital expenditure, you can then create employment and further develop those assets.

How should DC schemes manage when to invest over a whole cycle for individual private market asset classes, versus other areas?

Martin Dietz: Most private market assets are long-term assets, so we need to align them with investors who still have a long investment horizon. That means that private markets sit very nicely for young members in their portfolio, because they have a long investment horizon. In principle, they do not need a lot of liquidity for the next couple of years.

We are seeing a lot of UK members taking cash at retirement, so we do need to reduce long-term-focused assets towards retirement. There is potentially some scope to have shorter-duration private market assets around retirement, and assets that may still give some of the benefits of private markets, but that are easier to liquidate, price and handle around that point in time.

Private markets in general are a good addition to a growth portfolio. DC investors deserve access to the full universe of private market assets and to a global portfolio. A diverse portfolio of private market assets will help to manage liquidity and other operational challenges. And of course, we think these assets can diversify liquid market risks while still providing attractive returns.

Stephen Budge: We would always start from having a global perspective in terms of investment, and that is the standard portfolio thinking and approach in that sense.

This roundtable was held on 29 April 2025 in association with L&G