PI Partnership – Cambridge Associates


Ben Gunnee is head of UK & European business development at Cambridge Associates


Unfortunately, securing excess returns will likely be more chal- lenging in the years ahead. Current valuations, particularly in public equities, suggest future returns for traditional growth portfolios may be lower than historical averages. This means that active public equities – the mainstay of pensions’ growth portfolios – must work harder to achieve the necessary growth required to outperform the liabilities. So how, and with what risks, can schemes achieve excess returns?


The case for private equity


DON’T FORGET ABOUT GROWTH: PRIVATE EQUITY STILL HAS A ROLE TO PLAY FOR MATURE PENSION SCHEMES


In general, British defined benefit pension schemes have expe- rienced significant funding level gains, driven by sponsor con- tributions, liability management exercises and strong equity market returns, especially since the onset of the Covid pan- demic. Quite rightly, trustees and sponsors are focused on pro- tecting these gains while they progress to their long-term objectives. This type of action has been more prevalent during the past five years with schemes de-risking away from growth assets and into matching assets as certain funding level targets are achieved. However, while the focus is on de-risking, the question of how to continue generating meaningful growth has often been overlooked or completely ignored. With many schemes still relying on investment returns to make up the funding level gap, it is important that the growth assets are not neglected and we would argue they need more attention to maximise their contribution to the scheme. This is increasingly impor- tant given the increased volatility in global equity markets, rel- atively high valuations in many market segments and the late stages of the economic and credit cycles. It is akin to driving a car on a motorway at 70mph; if the engine size is small (less growth assets), then that engine will need to work harder to maintain the speed than a corresponding large engine. Clearly underfunded schemes require higher asset returns, but generating excess returns relative to liabilities is important even for better-funded schemes. Investment returns protect against unexpected increases to liabilities due to demographic changes, offset future administrative expenses, and help improve funding levels further towards the trustees’ secondary funding objectives (either buyout or self-sufficiency).


24 May 2022 portfolio institutional roundtable: Private markets


Increasing the allocation to private equity within the growth portfolio may enable trustees to achieve higher returns than those possible through traditional asset classes and provide the extra returns needed to push the assets towards the funding level target. Many a trustee meeting has been spent agonising over the appointment, or termination, of a global equity man- ager who is looking to target c100 basis point of outper- formance vs the index. However, little time at meetings has been spent looking at an asset class that has consistently exceeded public equity by several hundred basis points; the graph below illustrates the average private equity returns relative to public markets for Cambridge Associates clients. As can be seen over five and seven years, returns have been greater than 500 basis points.


Cambridge Associates’ private equity returns for our clients across cycles


24,4% 19,7% 17,3% 14,9% 17,1% 13,5% 13,4% 8,9% 13,4% 8,8%


5Yr


7Yr CA Client Private Equity


10Yr


15Yr MSCI ACWI mPME Source: Cambridge Associates LLC and MSCI


20Yr


It is not all about the returns By including private equity trustees can significantly expand their investment opportunity set, level of diversification and also offer some protection against public market volatility, which helps with the smoothing of the funding level. For example, the CA Global Private Equity/Venture Capital Index realised significantly less volatility and drawdown compared to


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