The US Department of Labor’s letter in June gave assurance that defined contribution pension plans could incorporate certain private equity products without violating the Employee Retirement Income Security laws.
Pantheon and Partners Group, the two private markets firms that sought guidance from the DoL in 2017, have over the years developed private equity strategies that can accommodate defined contribution plans in markets including the US, UK and Australia.
But what’s actually included in their US offerings?
Both firms’ DC products in the US are offered as a collective investment trust – an investment vehicle similar to a US mutual fund but that is available only to qualified retirement plans such as 401(k) plans – and structured as a custom target date, target risk, or balanced fund. These CITs invest in private equity and have a liquidity component to manage the participant’s deposits and withdrawals from the fund.
Pantheon and Partners Group’s DC products offer features such as liquidity, daily pricing, transparency and investment options with competitive fees.
For Partners Group, the largest component of their CIT portfolio is an evergreen private equity fund which, according to an SEC filing, is now $5.5 billion; a smaller part of the portfolio is in liquid securities and cash.
Robert Collins, managing director and head of the firm’s US distribution practice, told Private Equity International the firm’s offering is a hybrid structure, with an “overwhelming majority in a core, evergreen and highly diversified PE portfolio”. The firm’s private equity offering for the DC market is designed to be adopted by professionally managed or advised DC plans and incorporated in structures such as target-date funds.
Pantheon’s CIT, Pantheon Private Equity Select Fund, is understood to be an evergreen fund that invests in PE via secondaries, co-investment and primary investments and includes a portion allocated to liquid securities. The CIT has a target PE allocation of around 70 percent, subject to fluctuation over time, according to Douglas Keller, head of private wealth and defined contribution at Pantheon.
“Pantheon’s private equity strategies are generally weighted heavily to the US and Europe with a lower allocation to Asia – largely reflecting the evolution and maturity of the global PE market,” Keller said. In tune with Pantheon’s strategy, the CIT strategy focuses on the mid-market with diversification across stage, vintage year, sector, and, most importantly, manager, he added.
Collins and Keller could not provide further details on the products due to federal regulation and policy.
Both noted, however, that fiduciary oversight is an important aspect of their offerings. Collins said Partners Group’s offering is overseen by fiduciaries on three levels: at the target date fund, the CIT level and at the evergreen structure within the CIT.
Could the firms offer DC products created for other markets to the US? They could, said Keller, adding that as the market evolves, it is possible that Pantheon may offer other customisable strategies to the US DC market depending on what the plan sponsor community may want exposure to.
The significant challenge for plan sponsors is getting invested and staying invested while the DC market is growing, Collins said.
“Pension plan sponsors need a product that is able to grow and scale, as there have been meaningful net positive inflows of these 401(k) plans into target date funds, even during downturns like the global financial crisis and even this year,” he said.
More than 100 million US citizens are covered by DC plans, with DC assets in excess of $7.5 trillion, according to data from Vanguard.