I’ve been fortunate enough to have spent a reasonable proportion of my career advising institutional asset owners on private markets or managing portfolios on their behalf. In partnership with our clients, who range from Endowments & Foundations to DB Pension Plans, our collective efforts in this area have generated hundreds of millions of pounds in extra savings for the beneficiaries of our clients versus simply investing into passive listed equities. Yet when it comes to my personal savings e.g. my retail investment account or DC savings, options for private markets exposure are few and far between. This has been a major source of personal frustration; why am I not afforded the same options as the institutional investors I work with?
Given this context, I’m delighted to hear that the UK Government is seeking to make it easier for DC savers and retail investors to access the benefits of private markets. Recent announcements around extending the LTAF structure to retail investors and the Mansion House Compact focused on DC members should improve outcomes for end savers and lead to higher incomes in retirement. WTW has been engaging with the government on this topic for some time and recently publicly shared support for this initiative.
Of course, if this was easy to do, it would’ve been done years ago!
The most widely stated implementation issues for DC savers and retail investors investing in private markets generally include a lack of familiarity for platforms, product structuring issues, daily dealing requirements and excessive costs.
Even if these structural challenges can be overcome, building a successful private markets programme requires diligent implementation – finding the right investment talent who add genuine value to the businesses they buy (rather than relying on leverage to generate returns), building appropriately diverse portfolios that can weather downturns and avoiding paying away all the excess returns via high fees.
Private markets will be a new asset class for many DC and retail investors so guidance and education for end savers will be crucial. Savers need to understand what they’re buying and how they are different to more traditional investments like listed equity; these assets are long-term and illiquid so in order to maximise the benefit of the illiquidity premium, these should be the last investments that savers turn to when they need cash. Education will have to come from all participants in the industry whether that be asset managers, consultants, platforms, or others. High quality financial planners and wealth managers, like our partners at atomos, can help savers navigate those challenges also.
If the asset management industry can create appropriately structured vehicles and DC members and retail savers are able to find the right partners to successfully implement their programmes, we are confident private markets for the masses is a realistic outcome which will help drive innovation in the global economy and improve the financial outcomes for over 20 million UK retail investors[1] DC savers[2].
Given limited scope to pull on fiscal or monetary policy levers, there is clearly a political angle to these initiatives with the Chancellor turning his attention to regulation as a means to improve the growth prospects for the UK economy. UK Productive Finance, where money is directed towards private businesses in UK which in turn can create jobs and grow our economy, is a stated priority for the Chancellor. However, following input from us and others in the industry, we were very pleased to see that he stopped short of specifying required allocations to UK. We see great opportunities in the UK to help fund and support private businesses, but equally global investors like WTW and our clients need the flexibility to go where the opportunities are around the world, rather than fill pre-specified geographic buckets.
The recent announcements have provoked intense debate in the industry, including some vocal sceptics of the direction of travel. Some of the issues raised are well-founded, some are not.
Of course, critics are right to highlight the risks associated with aligning the liquidity of vehicles with the underlying investments, the challenges of identifying skill and understanding the relevance of track records.
That said, beware the agency issues of some of the sceptics. For two decades I’ve heard organisations who lack the scale and financial resources to build their own investment teams and get a fair deal on fees dismiss private equity as “just leveraged equity" and bemoan private equity as being “too expensive”.
When it's done well by organisations with the scale to ensure they don’t pay away the benefits via excessive fees, and talent which owns a long-term track record of investing in private equity, the asset class has proven it can outperform across cycles (up-markets and down-markets, high interest rates and low interest rates).
I look forward to continuing the debate and helping to bring private markets to the masses...
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