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Until now, defined contribution (DC) schemes have been hesitant to engage with private assets, citing this lack of liquidity as an issue for members who would like to move in and out of funds with little notice. But academic studies and industry evidence suggests that most DC members do not move their money around as quickly or as frequently as schemes expect. Instead, they continue to make monthly contribu- tions and build up their pot ready for retirement. With this in mind, DC members might appreciate being able to make an extra premium by leaving their money where it is for long periods of time. Moreover, for members who are part of a large DC scheme – something the government is encouraging through its master trust legislation – overall monthly contributions may be large enough to offset drawdowns or liquidity requirements. The payoff for embracing this illiquidity is often better returns than corporate bonds at equivalent credit rating, with typically lower default and better recovery rates.


Stewardship and ESG Growing societal pressure has meant all types of pension funds, along with insurance companies invest- ing to meet claims and benefits for members, are seeking ways to invest with stewardship of capital in mind. Through careful selection of private companies that are working to provide clear societal benefits, investors can also meet their own ESG criteria. For example, infrastructure debt can help fund the global transition to clean energy, while commercial real estate debt can fund social housing – both have been defined by the UN Principles for Responsible Investment as impact investments. As good stewards, investors can also offer fair interest rates to companies based on the risk taken, rather than what the market will stand.


Is it time for you to start thinking privately? We can help.


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October 2019 portfolio institutional roundtable: Private debt 23


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