Pension funds are buying up stakes in asset managers. Here's how those partnerships work.

Pension funds and other asset owners are taking slices of asset managers in deals that both parties tout as being symbiotic in terms of the advantages they bring together for both sides of the arrangement.

A flurry of recent agreements in the U.S., U.K., Middle East and Japan neatly demonstrate the key benefits of asset owners taking equity stakes in asset management firms, and in the private markets space in particular: pension funds are able to precisely allocate long-term capital to an asset manager and strategies that they will in some cases co-design; asset owners are able to negotiate lower fees; and they also are able to gain direct access to expertise in new areas of the markets without the need to build in-house capability.

For the asset managers, long-term capital often comes with such a deal, while the credibility that comes with such a tie-up may prove invaluable for future relationships.

One example of the benefits to both sides of the coin came on Feb. 4, when the £48 billion ($59.5 billion) National Employment Savings Trust, London, said it was taking a 10% stake in Melbourne-based private markets specialist IFM Investors’ parent company, Industry Super Holdings. Financial terms of the deal were not disclosed beyond confirming that it comes with a £5 billion commitment for investment in IFM-managed real assets and private markets strategies by 2030, as well as plans to co-design strategies in infrastructure and private equity.

In taking the stake — which Mark Fawcett, CEO at NEST Invest, said will sit in the defined contribution master trust’s private equity portfolio — NEST becomes IFM’s first overseas owner, joining a consortium of 16 Australian super funds.

The direct stake will help NEST on its way to allocating a targeted 30% of its assets to private markets by 2030, up from about 17%, or £8 billion, now. NEST is projecting its total assets will reach £100 billion by that time.

“We have a real deployment challenge, and we’ve got some great managers now,” Fawcett said at a news conference to announce the deal. “But for us, by taking advantage of and leveraging IFM’s expertise in private markets, we are going to accelerate our investments.”

The deal was the second equity stake to be agreed by a U.K. retirement plan within six months, following a September agreement that saw the £20 billion West Yorkshire Pension Fund, Bradford, England take a 25% stake in nature-focused asset manager Rebalance Earth.

West Yorkshire executives see climate mitigation, adaptation and nature-loss among key megatrends, risks and opportunities, so “our interest was instantly piqued in terms of long-term opportunity” when the Rebalance Earth team first approached about 18 months ago, said Darran Ward, head of alternatives.

Over a few months, WYPF's investment team discussed and analyzed the potential for taking an investment stake in the company. “For us, we gain access to expertise and innovation alongside the ability to be active owners and influential in a fast-growing subset of the private markets and natural capital space,'' he said.

"This is hugely important for us, as we seek to innovate and grow as both an organization and an investor, whilst staying true to our core believes of long-term investing, diversification and active, engaged stewardship.”

Historically — and more traditionally — the way pension funds and other asset owners have benefited from relationships with asset managers is via the returns the managers provide by running assets. Under those relationships, particularly those that have spanned the longer term, asset owners have also negotiated discounted fees, for example.

But in leaving the relationships at that asset manager/asset owner level, “I think they’re leaving money on the table,” said Mark Karasik, head of U.S. asset and wealth management at investment banking and corporate finance advice firm Fenchurch Advisory. By seeding strategies or becoming “systemically important to the asset manager, there’s an opportunity for them to extract additional value — and I think that comes in the form of a GP stake,” he said.

Jeff Stakel, principal at Casey Quirk, a Deloitte business, added that asset owners may take direct stakes in asset managers "to secure access to specific investment capabilities. Typically, you would see this in strategies that are high in demand but tend to be more capacity-constrained or harder to access — parts of the private credit market are good examples,” he said.

These kinds of deals are also tied to the insourcing trend among asset owners — which has been playing out over the past decade.

“Asset owners recognize that building the required talent in-house to manage these strategies is becoming more challenging,” Stakel added. “The skill sets needed to complete are evolving and in high demand throughout the industry — partnering with a manager helps secure access to this talent.”

The NEST move with IFM Investors ticks all of those boxed in terms of the drivers noted by Karasik and Stakel. Speaking at the event to announce the deal, Fawcett said: “Shareholders do get more competitive fees. That is one of the benefits of being an owner. And, as everyone knows, I’m super fee-sensitive,” he said.

NEST will also participate in IFM’s growth potential. The investment will sit in NEST’s private equity portfolio, “so this is an investment for the scheme. IFM have got great growth opportunities, and so we would anticipate also benefiting from the growth and value of the investment as a private equity investment in its own right,” he said.

And NEST CIO Elizabeth Fernando, also speaking at the event, said one of the attractive points about the partnership “is the ability to co-create a product that meets the needs of NEST… That’s the bit I’m really looking forward to, this ability to design products with a really expert team of individuals to drive” returns for participants, she said.

The reasons behind WYPF’s stake in Rebalance Earth were similar.

“As a large asset owner with a long-term horizon, we have a responsibility to provide direct patient capital where we can, where we have the knowledge and expertise and where we feel the long-term benefits outweigh the risks,” Ward said. “From direct stakes and close partnerships like these, we can gain access to, learn from, and benefit from the expertise, innovation, and strategic vision of skilled management teams,” which can lead to better overall performance, he said.

Such deals also give pension funds “the ability to capitalize on emerging trends and opportunities in the market — trends and opportunities that we can be at the forefront of, provide influence for and ensure alignment with our overall aims, objectives and beliefs at WYPF,” Ward added.

The pension fund has similar arrangements in place for private equity, via Northern Private Equity Pool LP — a private equity investment joint venture established in 2018 between WYPF and other local government pension scheme funds; and for infrastructure via GLIL, an open-ended fund structure established in 2015 by Greater Manchester Pension Fund, Manchester, England and the London Pensions Fund Authority; and subsequently joined by West Yorkshire, Merseyside and Lancashire pension funds in 2016.

There are also huge benefits for the asset manager that’s selling a stake to an asset owner, sources said.

“Right now, the hardest thing for asset managers is capital formation. Even really good asset managers —that have long-term track records, are generating alpha relative to benchmarks — are having a difficult time raising capital,” as the hot money is shifting into large alternatives firms in particular, Fenchurch’s Karasik said. “The middle market is hungry for capital,” he said.

The attraction from an asset manager is also clear in that a partnership like this can “secure long-term, essentially permanent, capital for its investment strategies,” Stakel agreed. “This can help create more stable long-term economics for the firm.”

At the NEST/IFM event, IFM Investors CEO David Neal said the alliance will “accelerate” what is already a growth story.

“What better way to do that than have a tie-up with one of the … fastest-growing” retirement plans in the shape of NEST, he said. The £5 billion commitment “is obviously going to be a very significant support for us — not just growing existing products, but developing new strategies that we can offer” to other asset owners, Neal added.

Other recent deals by asset owners to acquire stakes in asset managers include:

• The £6.5 billion Oxford Endowment Fund, Oxford, England and the A$57 billion ($36 billion) Commonwealth Superannuation Corp., Belconnen, Australia, will each own significant minority stakes in newly launched sustainable fixed-income manager Osmosis Investment Management NL, according to a Feb. 27 announcement.
• Japanese insurer Nippon Life Insurance Co. said it would invest an additional $550 million in Los Angeles-based fixed-income specialist TCW Group. The insurer also said in December that it plans to commit up to $3.25 billion to TCW’s private credit strategies.
• The $302 billion sovereign wealth fund Mubadala Investment Co.’s wholly owned subsidiary, Mubadala Capital, agreed to take private Canadian asset and wealth management firm CI Financial Corp. in a $3.4 billion deal in November.
• New York State Common Retirement Fund agreed to pay up to $350 million for Vista Equity Partners fund stakes, Bloomberg reported in September.
• Mubadala Capital in May completed a deal to acquire part of a 68% equity stake in alternatives manager Fortress Investment Group.

“I think we’re going to see more” pension funds acquiring stakes in asset management firms, Karasik said — especially alternatives where “there’s a lot of value right now. Valuations are attractive, positive secular trends are driving alternative AUM growth."

Stakel agreed, adding: “This has been a trend we’ve seen in the insurance space, and it could make sense for other large asset owners with long-dated capital.”