The Securities and Exchange Commission may be keen for retail investors to access private equity, but even among institutional investors and pensions professionals, there are sceptics.
Like the funds of funds industry, providers of 401(k) private equity products must show that net returns justify two layers of relatively high fees. “We were happy to pay for success, but we weren’t keen to pay for a lack of success,” said the chairman of a £4 billion ($5.2 billion; €4.4 billion) private pension fund that embraced PE.
The broad-brushed and largely successful move away from actively-managed public equities funds towards cheaper, passive strategies has made this a tougher sell in recent years, said one UK-based pensions advisory managing director.
“[In public markets], investors can say ‘I’m going to go passive because I don’t know if a manager is able to add value net of fees,’” he said. “Fees in private markets are higher because it takes a lot of effort and intellectual capital to do it well. If you can find a skilled manager, you find the net-of-fees outcome significantly improved, but it’s an if.”
Doug Keller, head of private wealth and defined contribution at Pantheon, emphasises the firm’s net-return track record and the diversification benefits that multi-manager portfolios can bring, while acknowledging the difficult choice faced by fiduciaries: “Private equity and venture capital have a wide dispersion of returns. It’s very important who you invest your dollars with.”
According to David O’Meara, a senior investment director with Willis Towers Watson, it should be possible to integrate PE into a target-date fund while keeping the headline fee down. This could be through delicately packaging assets in a way that creates a lower blended cost or by negotiating down fixed fees in favour of a higher performance fee. The important thing is that target-date funds have the same characteristics as other institutional accounts.
“Target-date funds have predictable cashflows; they are cashflow positive, then, as they get nearer to retirement, start being cashflow negative,” he said. “There is a chance to design an asset allocation similar to how we do other institutional asset pools, whether it’s an endowment or defined benefit plan.”
Even if 401(k) plans have access to the best GPs, will they get access to the best deals? Those in the market say yes. Partners Group and Pantheon both invest as a single platform, their commingled funds, separate accounts and 401(k) products tapping the same transactions. According to Keller, there’s also nothing to suggest that 401(k) money is seen as less desirable or less “sticky” by GPs than institutional capital. Even if there was, they have no contractual say in the matter.
Is an influx of retail capital even beneficial for private equity? It will build more fee-generating AUM for private equity firms, but won’t that only add to the problem of too much capital chasing too few deals?
Rob Collins, managing director with Partners Group, believes that 401(k) money will largely replace, not supplement, existing dry powder as banks withdraw from the market and defined benefit schemes are phased out. With the changing shape of the markets, it is imperative that pension plan members have this opportunity. “Public companies are in decline and private markets are growing,” he said.