Open-ended private market funds have potential for being more attractive to UK local authority pension funds, the Pensions and Lifetime Savings Association local authority conference heard on Tuesday.
Speaking at the conference, head of pensions and treasury at the London Borough of Haringey, Tim Mpofu, said that his scheme finds a number of things “attractive” about private markets.
Firstly, Mpofu said the longevity of the investment is appealing to the scheme’s “long-term investment horizon” pointing out that Haringey wants assets to be still available in 20 years time.
Mpofu added that the Haringey scheme has low liquidity being an open scheme and growth assets play “quite an important role” within the scheme’s investment strategy. But he said that this strategy is “particularly attractive” around “income generation”.
He said: “If you’re able to do some cash flow modelling, that might be something that might help as a front in terms of making sure that you’re able to pay those pensions on time.”
However, Mpofu said that one area that has been a concern for the scheme in terms of making allocations is that over time there “tends to be a mismatch” between valuation of liabilities.
He added that it is also “quite confusing” to understand why a scheme is investing in these assets.
“There’s an education piece that needs to be done. By the time you’ve completed that you’re probably moving on to a new valuation cycle and maybe the landscape has changed. So that’s been quite an issue in terms of just getting over the hurdle, in terms of our engagement with the members,” he explained.
Close-ended strategies
Mpofu added that another challenge is that a lot of strategies are still close-ended. As a result, an investment committee “is always having to make decisions in terms of how to allocate the strategies”, he noted.
He pointed out that there is some innovation in the market around open-ended strategies, adding that this is something that would be “attractive” to Haringey Pension Fund because decisions only need to be made once, allowing the scheme to treat it like any other asset class in terms of topping up their investment or making further allocations.
Nemashe Sivayogan, head of treasury and pensions at London Borough of Merton, agreed with Mpofu that open-ended funds would make private markets more attractive.
One of the reasons for that is that private market valuations “take time” and are “complex”.
“I would expect the fund managers to be more user friendly in terms of how they explain [the asset class] to the committee members and also [be more transparent] on the reporting and how they value their asset classes,” she said.
Sengal Selassie, chief executive officer and founder of Brightwood, pointed out that the financial market is definitely evolving and open-ended funds, also known as evergreen funds, are becoming more part of the landscape.
“Most managers are now integrating evergreen funds into their offering,” he said, pointing out that there are “various flavours of that” but effectively these funds allow pension funds to decide when to enter and when to exit.
He added that there will continue to be innovation on this front.
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