UK institutional investors are questioning the value of investing in private markets despite pressure from government to finance the country’s net zero and levelling up ambitions.
Speaking at the Pensions and Lifetime Savings Association Annual Investment conference, Dan Mikulskis, chief investment officer (CIO) at People’s Partnership a master trust providing workplace defined contribution schemes, says private markets are not accessible until investors reach a certain scale.
“We don’t invest in private markets at all. Is it going to play a part in our strategy in the future as we grow and get to a real scale? Probably. But private markets get put on a pedestal too much, and while there can be good investments, there can be a lot of bad investments as well,” he said.
Mikulskis also questioned the charges associated with private markets investing, arguing that the balance of power lies with fund managers.
“There is often a fundamental unfairness between manager and client in some of the structures that exist in private markets. Change is needed in the industry to get the right results for the members.”
Leandros Kalisperas, CIO at the GBP19 billion West Yorkshire Pension Fund, noted that 80 to 90 per cent of the local authority scheme’s costs comes from 15 to 20 per cent of the portfolio, which is allocated to private markets.
“That is a meaningful asymmetry. It does need to be understood as to whether that offers value for money to members,” Kalisperas said.
Padmesh Shukla, CIO at the GBP14.5 billion Transport for London Pension Scheme, said the fund’s multi-billion-pound commitment to private markets was “governance heavy” and warned that unless investors were well resourced, investing in the sector may not pay off.
Shukla said: “These are expensive, governance heavy asset classes. The range of [performance] outcomes from investing in private markets can be quite large. If you’re on the wrong end of the spectrum it will feel worse than investing in the public markets. Having the ability to do private markets properly is the key.”
The warnings follow a range of reforms from the UK government designed to make it easier for investors to allocate to private markets.
Chancellor Jeremy Hunt’s Mansion House reforms includes an agreement between major workplace pension schemes to increase investments in private equity, exploring handing defined benefit (DB) scheme sponsors greater flexibility to access surpluses and proposals to encourage consolidation of small pension pots.
