Private markets have demonstrated over decades that they can produce outsized
returns. Dan Aylott, Cambridge Associates
Suddenly, lock-in periods of seven-plus years have become more challenging if you now believe you could buyout within five years. So, where we have illiquidity, we are asking if it is an acceptable asset for the buyout market. As I say, the trend is towards defined contribution, especially the master trusts. I chair the Cushon Master Trust trustee board, which has an objective of “net zero now”. By definition, that needs illiquids and we are looking at a potential exposure of up to 15%, focusing on infrastructure, forestry and clean energy. We are conscious of understanding what we are getting into. Fortunately, everyone on our board is a professional trustee. It is a challenge from an educational perspective to take lay trus- tees along that journey. Private markets are wide ranging and the devil is sometimes in the detail. You need your wits about you when entering into these contracts. Reading 200-page subscription documents is not for the faint hearted.
Mark, what opportunities are you seeing in private markets? Mark Humphreys: Larger pension schemes, with their in-house resource, have been effective in exploiting the yields you can get above investment-grade credit. They do not have the restric- tions Phoenix has as an insurer.
Smaller schemes looking at a 10-year exit strategy, need to take care with longer dated assets as they would need to sell them in future at an unknown price. Shorter-dated private credit assets, such as direct lending, infrastructure and real estate debt, have a place in smaller scheme portfolios and can be easily accessed.
The yield premium you can get over investment-grade credit can feed through into actuarial assumptions, which can take pressure off sponsors because there would be less reliance on employer contributions.
income markets to create balanced portfolios. We put greater emphasis now on how our investments can be impactful. Martin Collins: The role of private markets has always been a return driver, but it also offers diversification because it allows access to markets you cannot get to through public markets. What has changed for private markets in the past few years has been the increased focus on liquidity. Around 20 years ago you might have assumed that you could invest forever. The growth of buyout transactions and the like means you need to recon- sider how much liquidity you have. Roger Mattingly: The trend is increasingly towards defined con- tribution (DC). A number of my defined benefit (DB) schemes, through economic circumstances in the past 12 to 18 months, are now better funded compared to the historic deficits that were so prevalent.
The yield gap is an opportunity for smaller schemes and has the added advantage that a lot of these instruments are float- ing rate or have frequent re-sets. So, if interest rates rise over time there is an element of protection against that and inflation.
Dan, what are you seeing in private equity? Dan Aylott: Where we have been directing our clients’ attention has not changed in the past few years. Even through the excep- tional times we have lived through with Covid, Brexit and now the war in Ukraine. Despite all that uncertainty, our long-term views have held firm. We have a preference for orienting our clients towards the smaller and lower-middle ends of the private equity market where we see better valuations. There has been a huge amount of money raised, a lot of which is being held by managers at the upper end of the market who are aggressive buyers of the busi- nesses smaller managers invest in.
May 2022 portfolio institutional roundtable: Private markets 9
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