Master trusts are exploring ways to invest in venture capital, once again leading the defined contribution pensions sector in private markets.
Master trusts were the first defined contribution (DC) pension schemes to make major allocations to private markets. As these multi-employer schemes continue to build scale, they are once again leading the sector by providing funding to start-ups through venture capital (VC) allocations.
NatWest Cushon has a target allocation for unlisted assets of 15% and has already invested in areas from private equity to renewable infrastructure. “VC is the next stage,” said Veronica Humble, CIO of master trust NatWest Cushon.
She says long-term investing in early-stage companies fits members’ investment timetable, at the PLSA Investment Conference last week. “It’s very much aligned to the long-term time horizon for DC members. At 10-15 years, or even longer, from a member outcome perspective, it’s an attractive asset class.”
“Ordinary DC savers have had no access to VC whatsoever. I’m very excited to be working… to find a way to democratise access to it.”
Douglas Hansen-Luke, executive chairman of Future Planet Capital
She acknowledged that there are still a lot of challenges to investing in VC. “But we’re not new to trying to overcome them… we already have unlisted assets in our portfolio,” she said.
Cushon is already working with two VC managers, Climate Capital and British Business Bank, and will make allocations later this year subject to the trustee approval.
“We will be investing in early-stage companies, which are hoping to make a breakthrough here [in the UK] or build there. It’s something that we will be able to illustrate to members and make the pension space much more accessible and tangible.”
Douglas Hansen-Luke, executive chairman of Future Planet Capital, said that DC members generally should be allowed to benefit from the exceptional returns possible from VC.
“It’s actually just about fairness,” he said, stressing the need to expand the investor base from high-net-worth individuals, endowments and defined benefit pension schemes. “Ordinary DC savers have had no access to VC whatsoever. I’m very excited to be working… to find a way to democratise access to it.”
Overcoming challenges
However, DC investment in VC remains at a very early stage. Stephen Budge, partner, LCP, noted that a lot of schemes investing in private markets “are still at step one”.
“They’re trying to find their way, which tends to be more multi-asset as the first step. We are starting to see a move towards more specific allocations, maybe growth equity. At this point, it’s more about getting the core started and progressing from there.
“We expect that allocations to newer ideas, more venture-level ideas, will start to become common in portfolios, as we allocate to private markets in the future.
As DC pension funds move to increase their allocations to private markets, they will need to expand their governance capabilities and rely on platforms to gain access.
Joshun Sandhu, head of investment solutions and partnerships at Mobius said he is not seeing “widespread demand at the moment”. He said the challenges are twofold: operational and regulatory.
Operational challenges include how to invest in VC funds, how frequently to trade, the reliability of valuations and performance measurement.
“The challenges are some of the same ones we’ve been tackling in other private markets, but they’re probably a bit more significant for venture capital, a bit more to think about with small companies.”
On the regulatory side, the challenges relate to fund structures, in areas including suitability and liquidity.
“We need to look through to the underlying assets,” he said. “What level do we need? What do we need to do to fully understand and satisfy our requirements?
“There are challenges facing venture capital managers trying to launch a product. It might be difficult and costly – but these are challenges we can tackle.”
Veronica Humble will be speaking at PMP’s Defined Contribution Summit on 23 June