PE Panorama: Squaring the circle

01 September 2014   Category: News, Asia, Global, United Kingdom   By Paul Mackintosh

Private equity firms are looking at fresh avenues for raising funds directly from retail investors, according to a report in the Wall Street Journal (WSJ) that taps into the existing trend among some big-name private equity players to diversify their fundraising options by providing pension benefit products directly to pension-holders. What the article doesn't address so directly, though, is the thorny question of whether pensioners should be investing directly into a high-risk asset class like private equity in the first place.

Pantheon Ventures, the relatively venerable London-based fund of funds investor, with “US$30.5 billion in assets under management” (as of March 31, 2014), is the platform cited by WSJ, with a plan to offer a private-equity product to defined contribution (DC) pension plans such as the US 401(k) system, by as early as 2015. For retail investors wanting to get in on the act, Pantheon does already offer Pantheon International Participations, a “private equity fund of funds investment trust”, publicly traded on the London Stock Exchange. This recalls the public listings of Carlyle, KKR, and similar private equity majors, and both these firms are cited by WSJ as also working on DC plan products for investors.

A fund of funds platform admittedly should act as a risk moderator and mitigator for investors, especially in the seasoned hands of an entity like Pantheon, which “has invested in more than 1,000 private equity funds since its inception in 1982”. That said, that risk mitigation also comes at the cost of an averaging off of performance, and raises the question again of whether the platform can achieve returns much in excess of public markets investments over the same period.

This may also be a way to bridge the gap between defined benefit (DB) pension plans, traditionally a major reservoir of private equity fund investment, and DC schemes, which usually allocate much lower proportions of their assets to private equity. The issue holding DC schemes back from private equity is liquidity, as manifest in daily reporting and mark-to-market performance accounting. Although not all DC benefit plan types require this, many do, and the long-term and illiquid nature of private equity investment works against such a structure. However, the Pantheon product now under development does reportedly offer such daily reporting, along with daily liquidity. That could require some smart structuring, although conceivably it is feasible. Daily liquidity rather militates against the supposed long-term nature of the asset class, but if Pantheon can square the circle so successfully, all power to it. Perhaps its well-established track record as a major investor in the private equity secondaries market could be especially important here.