How private equity is adapting to DC pensions

Partners Group and Pantheon are two of the firms spearheading the push to create products suitable for defined contribution (DC) pension plans.

Partners has developed a product understood to invest more than half its assets in Partners’ flagship private equity fund, which provides direct exposure to companies, as well as to primary and secondary funds owned by Partners and firms such as Carlyle, KKR and Advent. The remainder is invested in listed private equity funds. It provides daily pricing and liquidity.

Individuals gain exposure to the strategy through a target date fund (TDF), a retirement product growing in favour in the US and UK, which is tied to the retirement age of the plan participant. TDFs scale down their equity component and up fixed income to become more conservative over time.

Pantheon is understood to be taking the same structural approach, offering its product to sponsors through their TDFs. Pantheon’s product is understood to use a mixture of cash and exchange traded funds – that effectively replicate private equity market exposure – to provide liquidity.

Other firms are making similar efforts to bring in DC pension scheme participants and other retail investors. The Carlyle Group, KKR and secondaries firm Pomona Capital are among those to establish joint ventures providing accredited investors access to private equity at a minimum subscription of $25,000.

And Pantheon also announced last year the 1933 Act registration of the AMG Pantheon Fund, opening it up to minimum subscriptions of $25,000. Partners stands out as the only firm not teaming up with a specialist provider.

However, some are not sold on these efforts. “The retail market is sometimes portrayed as the Holy Grail, but personally I’m sceptical because nothing convinces me the liquidity will be there in a crisis. [For example], listed private equity worked well until the market crashed and then we saw quoted private equity was more volatile than equity markets,” says Sven Lidén, managing director and CEO at Adveq.

Bon French, executive chairman at Adams Street Partners, says the “facts of life” make structuring a DC offer difficult: “People get divorced, laid off, die. And retail investors want some kind of liquidity option – you can put wrappers around things and create structures but that costs alpha.”

HarbourVest managing director John Toomey also strikes a note of caution: “A couple of managers have evangelised the opportunity, but it’s not transparent how much AUM has transpired for that market. I wrote a paper in 2000 about the decline of DB plans and its impact on private equity and between now and then trillions have been raised by private equity managers from evergreen, institutionally managed schemes. The tail will be a lot longer on defined benefit [than some say].”

The jury is very much out on whether these structures will bring defined contribution money flowing into the industry. Despite shopping its DC product for over two years, Pantheon has yet to announce a client. Partners has announced a US client for its DC product – but it’s an (unspecified) DB scheme.