Our Insights

With continued high private market allocations within UK pension schemes, the challenge of managing the ongoing investment, operational, legal, and tax related tasks is becoming more and more pressing.

Getting these things right is central to maximising value from allocations to private market funds.

One of the commonly quoted reasons for employing an OCIO or fiduciary manager is easing of governance burden, through outsourcing of business-as-usual and operational tasks to an external provider.

In our experience, the most time-intensive element of such day-to-day pension fund management relates to private asset fund investments. While there is certainly a lot of work required upon making a new allocation, this is often just the beginning.

The graphic below illustrates the sheer number of different matters that need to be addressed and managed during a life of a private markets fund:

Since private assets are often illiquid and cannot be sold easily and quickly, a newly appointed OCIO or fiduciary manager needs to ensure they can effectively deal with tasks associated with existing exposures.

This includes operational issues, as well as, importantly, forward planning which minimises risk of forced selling. The existing funds are likely to be at various stages of their lives – some still drawing capital, others mostly returning it, some undergoing restructuring, others seeking LP approval on an important change, and yet others requiring a secondary sale.

At Brightwell, we think that the cost and complexity of these aspects of the management of private assets are underappreciated. For our existing clients, we find that almost every week there is a matter that requires a decision, signature or some operational action from our side.

Secondary sale opportunities, when pursued, can be labour-intensive projects in themselves. And even if there are no tasks stemming from private funds, we might need to plan for portfolio rebalancing in case liquid assets become volatile.

These activities may not be as glamorous or exciting as appointing new managers and funds, or designing strategy, but they are central to maximising value from these investments. This is why pension schemes selecting their fiduciary or OCIO manager should pay particular attention to how well their prospective providers are set up to handle these issues, and how incentivised they are to do a good job.

3) Proactive approach. We see the negotiation of legal terms, structuring and operations as opportunities for value add. For instance, we have typically taken an LPAC seat (>20 funds at present), playing an active part in ensuring that LP interests are well represented. We have also sold private exposures in secondary markets proactively to lock in the desired level of return, rather than simply in response to liquidity constraints. We have found that being a proactive seller can make a material difference to the exit price. We have also restructured a number of mandates, where it was beneficial to do so, including buying out a small investor to enable a more custom mandate design, or restructuring of an infrastructure fund to improve fund terms and liquidity.

4) Cost conscious by nature. Our roots in managing pension scheme investments have ingrained in us a culture of cost-consciousness. We are acutely aware of significant impact that seemingly small cost savings can have on long-term outcomes, particularly in private assets where fees and expenses can quickly erode returns. Whether negotiating fund terms, optimising legal and operational expenses, or managing secondary sales, we approach every decision with a strong focus on ensuring value for money for our clients. By maintaining this discipline, we believe we can help schemes achieve their financial objectives without unnecessary cost leakage.

Glossary

LPA stands for Limited Partner Agreement – a document that outlines the terms and conditions of a limited partnership, including the roles and responsibilities of the general and limited partners, the distribution of profits and losses, and the management structure of the partnership.

LPAC is a Limited Partner Advisory Committee – a group of selected limited partners in a fund that serves to address key issues such as conflicts of interest, material changes to the governing documents, or valuation methodologies.

SPV is a Special Purpose Vehicle – is a distinct legal entity established by a company to isolate risk. It has its own assets, liabilities, and legal status.