Aberdeen Asset Management’s alternatives division is working on products that cater to the liquidity needs of defined contribution (DC) benefit pension funds to tap the retail market.
Speaking exclusively to Private Equity International at the close of a two year buying spree for the division, Aberdeen’s global head of alternatives Andrew McCaffery noted that ways to serve the DC market have taken up many recent strategy conversations, both internally and with clients.
“This is a potential Holy Grail for us, because you are gaining access in part to the retail market,” McCaffery said. “Unfortunately, we won’t be there tomorrow, but it is very firmly on our radar screens because it speaks to that need to be the universal provider.”
Aberdeen has $430 billion of assets under management, of which $34 billion are in alternatives and $16 billion in private equity portfolios. It has yet to structure a private equity vehicle targeted at DC investors.
“We are more than just monitoring this area, but the difficulty remains that while there is a long-term need for pensions to access illiquid assets, the regulatory ‘Catch-22’ revolves around liquidity mismatch and valuation needs.”
Questions remain as to how you achieve quarterly liquidity DC funds require, and how to make pension trustees comfortable with the liquidity requirements, he said. He voiced scepticism that products already launched in the market could generate that liquidity, but added that the firm’s experience with liquid alternatives on the hedge fund side has encouraged it to keep working on a DC product.
Partners Group launched its first DC product in August targeted at the US market, as reported by PEI. It planned to roll out its Australian fund in early 2016, followed by a vehicle structured for the UK market.
It followed Affiliated Managers Group and Pantheon that, in November, launched a multi-manager, evergreen fund targeted at accredited retail investors that mimics Pantheon’s existing institutional fund investments, as reported.
A second key growth area McCaffery identified was customised separate accounts. Currently, these mandates make up 30 percent of the group’s private equity portfolio, and 45 percent within the wider alternatives group.
Much of this interest has come from North American LPs, many of whom came with Aberdeen's 2015 acquisition of fund of fund group FLAG Capital Management, but McCaffery also noted rising demand from Asia investors now accessing the asset class, often for the first time.
“A lot of Korean and Japanese investors are increasing their exposure. They may have bought in a certain amount of expertise, but it is limited in terms of what they need to try to achieve. For them, it’s much more a case of, ‘We don’t want to buy a fund, we may own bits along the way, but the reality is that we want our own portfolio.’”
In terms of longer-term existing investors, McCaffery admitted that some have been voicing concerns over how the firm can maintain its focus on performance and capacity management as its assets continue to swell. The group is monitoring capacity closely and dealing with the issue relatively comfortably, he said.
“If you look at all our fundraisings, they are all incremental size gains, but consistent in terms of generating the style of returns we want.”
Aberdeen reached final close on its US Private Equity VI fund on $295 million last October, $70 million above target, as reported by PEI. It was the first fund close since Aberdeen completed its acquisition of the US’ FLAG Capital Management, which added $7bn of assets to its balance sheet.
Through FLAG, Aberdeen expanded its footprint in Asia thank's to FLAG's acquisition of Asia-based Squadron Capital Management in late 2014. In 2013, Aberdeen acquired a majority stake in asset manager SVG Advisers. It completed its acquisition of Arden Asset Management early this year.
Look out for the full interview with Aberdeen Asset Management head of alternatives Andrew McCaffery in the March issue of Private Equity International, out on 1 March.