Numerous difficulties still exist for those in the investment sphere around accessing private markets, as well as the details around it. Some of these issues are directly related to direct benefits (DB) and direct contributions (DC), which has been a persistent matter for the industry for some years.
At a recent Clear Path Analysis event, Investing in Private Markets, Europe 2022, industry leaders from organisations including The Pensions and Lifetime Savings Association (PLSA), abrdn, and Railpen gave their thoughts on how the private markets investment sphere can work around these barriers to investment in longer-term, less liquid assets.
One of the main issues discussed was the way the media portrays the market and its faults, particularly around regular financial disclosure. In 2021,the US Securities and Exchange Commission (SEC), released a speech, which said, “The expansion of private markets is not the natural result of the evolution of “free market” forces. Rather, it is a product of the framework of laws and regulations through which markets operate.” The paper further reiterated that the lack of transparency in the market was a source of concern, which was also highlighted in the event discussion.
“If you make a mistake and want to change your mind, it is incredibly
expensive to get out."
“In private markets, the borrowers are private,” said Chris Palmer, Head of Illiquid Asset Origination, Phoenix Group, of one of its key barriers to further expansion and adoption – he also highlighted the way it is affected by the DC and DB debate. “This means that there are no listed bond or share prices that you can go look at to track daily. There is a lot of extra work to be done to get close to the borrower that you are investing in or lending to in order to ensure that you understand what you are doing,” he explained.
Palmer added that since the markets are private, they can come with enormous downsides, which some may not be aware of. “If you make a mistake and want to change your mind, it is incredibly expensive to get out” and that “You practically have to give it away. You can’t phone up a broker and ask for a price and say it’s theirs. As a result, you have to do a lot of work up front,” he said.
He continued by saying that in a DB scheme, the members are almost blind to what the scheme is invested in. “What they care about is their corporate sponsor or insurance annuity provider being sufficiently robust to pay out their pension every month for the rest of their lives,” he said. “Where the corporate or insurance company gets their money from is something that most DB members are completely blind to.”
“There are only 10-15% of people who make a choice and make noise by writing
letters and emails and demand 500 different funds to choose from."
The PLSA says that private markets offer three key positive characteristics that can substantially benefit existing DC portfolios:
This style of ‘blind’ investing compares to a DC scheme, where people have more choices. “[They] are taking all of the investment risk for their future, over 80% of people opt for the default scheme,” said Palmer.
“There are only 10-15% of people who make a choice and make noise by writing letters and emails and demand 500 different funds to choose from,” Palmer concluded. “Most other people don’t bother and just let the money go in every month.”
