Willis Towers Watson eyes up to $1bn for passive PE offering

The private fund model needs to be disrupted to allow defined contribution plans access to the asset class, says the investment consultant’s head of private equity research.

Willis Towers Watson, one of the most influential gatekeepers in the pension fund industry, expects it could help clients deploy as much as $1 billion into a passive private equity strategy.

Andrew Brown willis towers watson
Brown: we want the beta of the private sphere

The investment consultant this month set up a working group from its public and private equity investment research teams to assess the potential for what it calls a “new breed” of investment managers that invest across the entire equity spectrum. The aim is to capture “beta” from unlisted companies without paying private equity’s two-and-20 model.

“The opportunity could be massive,” Andrew Brown, the firm’s head of private equity research, told Private Equity International. “You have a lot of defined contribution plans who want to go into PE but can’t afford it, so if you have a cost-effective way of doing it and give investors enough diversity to provide a beta exposure with some stock selection, then the initial fund size could be substantive.”

As companies stay private for longer, investors are missing out on access to their growth via public markets. The private equity model needs to change so that pools of capital such as defined contribution plans – which require liquidity, frequent valuations and that focus on lower fees – can capture these opportunities, Brown said.

In the US alone, individual retirement accounts and employer-sponsored DC plans, including 401(k) plans, represent a huge pool of investable funds, accounting for 62 percent out of a $32 trillion retirement market as of the end of 2019, according to data from the Investment Company Institute.

Brown noted that Willis Towers Watson, which manages around $2.6 trillion in assets, works with many DC plans that would be willing invest in an offering that provided access to private companies outside a traditional PE fund model.

Of all the potential benefits of including private equity investments in DC plans, access to higher returning assets is the most fundamental – in the same way investors in the 1990s had beta exposure to a much larger public market, Brown said.

A passive, beta offering may be hard to digest for most PE firms, which pride themselves on an active ownership model, he admitted. However, the plan would be not to offer clients access to a particular manager’s skill; rather, access to the “beta of the private sphere”, he said.

“If you had a model where instead of charging two-and-20 you have 10 or 15 [basis points], then you don’t need all the bells and whistles to generate an attractive equity return,” he said.

The working group intends to find managers who will work alongside the consultant to tweak the PE model to bring more investors into the asset class. The model will most likely be in the form of an evergreen structure.

“You don’t need to do a whole lot of value creation if you are going to build a portfolio of 200 underlying private business,” Brown said. “We just want the beta of that.”