Private markets – Feature
But Sam Burden, client director at independent trustee firm Zedra, says this requires scale.
“I am a proponent of investing in illiquid assets if you can get over the practical challenges, and there are a lot of hurdles to overcome. If you invest in illiquid assets you will need scale to ensure you can still meet daily trading requirements. “At the moment it seems the master trusts are the only ones with the scale to look at this,” he adds. And despite the advent of LTAFs, the PLSA says typical fund structures and fee models “do not accommodate DC schemes’ needs well for illiquid investing”, noting that scale in DC is delivered through platforms but these “currently offer limited choice, if any, which means these are only accessible to the much larger schemes currently slowing down take-up”. Joe Dabrowski, deputy director of policy at the PLSA, says: “LTAFs are fairly new, and it takes a while for trustees to have a look at what’s available and make a decision about investing. We are beginning to see some of that come through the system now and more will probably come through during the year, but it’s not going to be a big bang change.” The PLSA says that while some platforms can accommodate in- vestment in illiquid assets, others still need to evolve their sys- tems and processes to be able to do so. Some structures also face restrictions under the permitted links rules for unit-linked life policies.
This means more platforms evolving their systems and processes. Heather Brown, senior client solutions director at Aviva Inves- tors, says: “I haven’t seen much movement from platforms on illiquid assets and I’ve been hearing that some are maybe bet- ter than others. But this could change quickly.” The PLSA says it is “essential to establish a rich, and continu- ous pipeline of enterprises needing investment for providers to bring to market and investors to choose from.”
The association calls on the asset management industry to focus on sourcing UK opportunities and developing new investment funds and products which are appropriate to pen- sion fund needs.
Governance burden Given that members bear the investment risk and typically incur the fees in a DC scheme, making sure they are on board with illiquid investments is important, and that responsibility falls to trustees.
The challenge, according to Brown, is convincing them that illiquid assets will live up to outperformance expectations over cheaper passive equity strategies. “Passive equities had a good run over the last 15 years, and they have served members well. When making the case for illiquid assets in DC, the challenge we hear is ‘where’s the evidence that we would be better off?’. There’s no crystal ball gazing,” Brown says.
This is compounded by the additional governance burden of investing in illiquid assets.
At the moment it seems the master trusts are the only ones with the scale to look at this.
Sam Burden, Zedra
“It is fair to say that illiquids require greater hands-on govern- ance from a board of trustees,” Mistry says. “The trustees need to understand the underlying investments the scheme has exposure to, as well as the issues around liquidity and how these can be resolved. “Asset managers” Mistry adds “have a key role to play” helping schemes understand the issues around their cashflow and investment objectives, and then providing the right blend of assets which can combine ready sources of liquidity with long- term, sustainable growth. But so too do investment consultants not only in the education piece, but in ensuring schemes are aware of the available products, and Brown suggests provision of the latter is somewhat patchy. “A lot of [investment consultants] have come out over the last 12 months as fully supportive of the [illiquid asset] regime and structure. But what’s interesting is where they are in terms of their manager research process, because as much as they might be talking to schemes, unless they have actually done that research, then they are not in a position to recommend any funds to schemes. I think that progress is quite different across the consultant universe,” she says. Irrespective of the theoretical benefits from including illiquid assets in DC schemes, the practical realties of doing so remain profound. Considerable advances have been made in terms of regulatory reform and product innovation, but the journey is far from over. A concerted and combined effort from policymakers, asset managers, platforms, investment consultants, master trusts and trustees is needed if members are ever to realise the long- term potential illiquid assets can offer.
Issue 125 | July-August 2023 | portfolio institutional | 49
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