Consultants offer different perspectives on fund structures, educational requirements and the suitability of opportunities
DC master trusts are set to substantially increase their exposures to private markets but asset allocators are taking varied approaches to their journeys, including whether to allocate to venture capital (VC), delegates heard at Longview Networks’ Institutional Venture and Growth Forum last week.
Alison Leslie, head of DC investment, Hymans Robertson, noted that LTAFs “really launched DC access into private markets” while some schemes have opted for SPVs or segregated mandates. “There’re several different ways of accessing them. We’ve typically seen a multi-asset approach – but some have already made very small allocations to venture.”
While allocating to an LTAF is the most common approach, with underlying exposures to private markets, these structures can take many forms.
James Monk, investment director, Fidelity International, noted the LTAF structure provides a gateway to liquidity and other benefits, but it is only the first of many decisions when designing a purpose-built private markets structure. For example, LTAFs have differences gating restrictions and dealing and notice periods.
He said: “You need to do major scenario modeling within the LTAF itself, to see what it can accept in terms of market volatility, but also at the master trust default level. What happens if there is a significant outflow or there is a public markets shock? How does that affect strategic asset allocation?”
Fidelity FutureWise’s default fund invests in an in-house LTAF that allocates to closed-end funds, which Monk says allows access to the best managers.
“We’re not quite yet comfortable enough to allocate to venture. We’re more focused on the buyout end of the spectrum. But as the portfolio diversifies and matures, we absolutely see reason to get behind venture,” said Monk.
He noted that some other LTAF managers have focused on open-ended structures. “While that makes sense for certain asset classes, does that smaller opportunity [set] provide liquidity? I’m keen to pop the hood on LTAFs and look at the dynamics underneath.”
Umang Rajbhandari, investment consultant, Barnett Waddingham, added: “Evergreen funds and LTAFs have been two big areas that have grown in the market. There are definitely pros and cons to both.”
Education needed
DC pensions trustees can often benefit from education around venture capital, according to Leslie. “There’s much upskilling to be done across the piece,” she said. “Trustees’ past experiences [in DB] may not necessarily have been positive and there are challenges around the macroeconomic environment.
“There is also a discussion around fiduciary duty for VC. In DC you are dealing with other people’s money, so is it appropriate to take this level of risk?”
That said, she added: “I don’t think [these challenges are] insurmountable. There are good news stories out there – LGPS funds have invested and it has worked out very well for them. Joining the whole thing up is key.”
Rajbhandari said: “There’s a big education piece for the pension industry as there are particular nuances to VC, such as the concentration of returns at both the fund and industry level.”
Performance differentials are another key consideration, he said. “Manager selection and access to the top managers are key drivers of performance… You might know who the top managers are, but accessing them is incredibly difficult in VC.”
He suggested an effective approach to VC could involve fund of funds or secondaries managers “that can access [top managers] and potentially get you into the funds you want, while you build up internal expertise.”
Monk says Fidelity did not sign the Mansion House Accord as it did not want to limit its LTAF allocators’ opportunity set. He cited FCA data that showed less than 10% of global private markets opportunities are in the UK – while the accord suggests a 50% allocation.
“I see the UK as a fantastic opportunity for the longer term, there’re lots of good reasons for that,” he said. “But we really need to balance all opportunities in a global context to make the absolute best allocations for our members.”
Rajbhandari concurred: “As a DC investor, I don’t see why you wouldn’t expand your opportunity set to have global reach. A narrow focus on UK venture could result in negative outcomes if we flood money into the sector. There’re probably more UK-specific opportunities elsewhere, for example in infrastructure or maybe private debt, than in VC.”