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Special Report

Private equity managers eye liquid assets for strategy diversification

To help meet plan executives' daily valuation and liquidity demands on the private equity side, Partners Group AG and Pantheon Ventures LLC launched strategies that include an allocation to liquid assets.

The majority — 70% — of Partners Group's strategy is invested in a “diversified, true private equity portfolio,” but includes a 30% allocation to listed private markets for liquidity, said Robert Collins, New York-based managing director, investment solutions Americas.

The strategy is structured as a collective investment trust and is intended to be used in a professionally managed portfolio, such as a target-date fund.

Mr. Collins declined to provide performance data but said because part of the strategy is invested in an existing evergreen private equity fund that the firm has managed for more than seven years, the portfolio team has been able to mitigate the J-curve effect.

“Many plan sponsors today are exploring ways to bring the best parts of a DB portfolio to DC,” Mr. Collins said. “Private equity is one of the most important parts of the DB portfolio.”

Mr. Collins believes the litigation-heavy environment has kept U.S. asset owners and large target-date providers from adopting the strategy, which launched in 2015. The strategy does have a DB client — a Midwest health-care system that committed $50 million in 2015, which he declined to name. Pantheon's private equity strategy also launched in 2015 and has two large corporate DB clients who committed an aggregate $75 million, said Kevin Albert, New York-based managing director and head of global business development. He also declined to name the clients.

The strategy will include a 20% to 30% allocation to the S&P 500 to fund capital calls and support daily movements in and out of the fund.

To come up with a daily valuation, Pantheon updates general partners' most recent quarterly valuations with information on actual transactions on the funds, market views and macroeconomic data.

Mr. Albert pointed to the declining number of public companies as one reason why DC investors need to have a slice of the private market. He also noted a January study from Pantheon that found adding assets with higher expected returns, like private equity, to target-date funds could potentially improve investors' retirement income by 8.7% without increasing risk.

Hoping to quell plan executives' fee and litigation concerns, Pantheon announced in February a performance-based fee option for the strategy, said Dennis McCrary, partner at Pantheon. Under this option, the firm only gets paid when the illiquid portion of the strategy surpasses its benchmark, the S&P 500. There are no fixed management fees.

Pantheon's strategy is also structured as a collective investment trust and is intended be used in a target-date funds or other professionally managed portfolio.

Mr. Albert said some of plan executives' reluctance to invest in the new strategy is understandable. “You generally need a two- to three-year track record before people start giving you money. Just from seed money, we surpassed a year,” Mr. Albert said.

He added that the firm faces competition from plan executives that can unitize their defined benefit private equity programs. With many corporations winding down their DB plans, this competition is more strongly felt on the public side, Mr. Albert said.