Private debt – an opportunity or a challenge for DB and DC pension schemes?
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With yields having been unattractive for a while now and markets taking a more volatile turn, UK pension funds have been considering illiquid assets and private market investments to boost returns and secure cashflows. But are these asset classes accessible to all schemes, and what are DB and DC schemes most concerned about? M&G Investments and mallowstreet Insights have partnered to find out.
Should DB schemes increase allocations to private debt?
Both Aon and Barnett Waddingham have reported that pension schemes are increasing their allocations to illiquid assets, including private debt. Such assets have seen a particular increase in weight in CDI strategies, according to a study by RiskFirst.
However, attendees at the mallowstreet Private Markets Focus expressed concerns that returns from illiquid assets may not justify origination costs. A further challenge is the proliferation of funds – a crowded market means too much money is chasing too few good assets.
Schemes working towards a buyout may find themselves at an even bigger disadvantage – insurance companies do not favour such assets when pricing a transaction. Hence, many pension funds either do not consider private markets a suitable investment, or may find themselves in trouble because they have invested too much.
Can DC schemes invest in private debt?
NEST recently made headlines with its first investments into infrastructure and real estate debt. In addition, the British Business Bank has launched promotional efforts to make DC investments in growth equity possible.
In parallel, the FCA has just announced its revised requirements for non-UCITS retail schemes investing in illiquid assets. Such schemes will be required to provide investors with clearer and ‘prominent’ information on liquidity risks, as well as the circumstances in which access to their funds may be restricted.
Could all these developments be paving the path towards more access to illiquid assets for DC schemes? The daily liquidity framework, in which they operate, has thus far deterred investments in private markets.
Is private debt an opportunity or an obstacle for your pension scheme? Take the Private Debt Survey to share your views and concerns.
