The defined contribution (DC) market remains a frontier, of sorts, for asset managers seeking to tap the $4 trillion being invested by plan participants. In what is thought to be a first of its kind in the industry, Brookline, Mass-based Anova Consulting, is launching a study on behalf of private equity firms to look at how best to get into that market.
“In the last several months, we’ve noticed releases and nuggets of information of private equity firms eyeing the DC space,” says Rich Schroder, president of Anova. “My sense is that fund raising is getting more difficult and competitive from traditional sources with the decline of DB plans and the growth of DC plans,” he adds, noting that funds within the DC market would be a potentially good alternative pool of funds to tap into by private equity firms.
Andrew Cloutier, director of client service with Anova, adds that the trend within DC is toward more target date and lifecycle funds that take some of the decision making away from the participants. “So if there is a role for private equity, it might be in a target date fund, which might be the most logical entry for them,” he notes.
Cloutier also points to the fact that DB plans have been outperforming DC plans and there is a retirement readiness gap between the two types of pension funds. “One way to close that gap would be to have higher performing investment options in DC plans,” explaining that DB plans have already used alternative and private equity investments.
Schroder stresses that his firm does not take sides – good or bad – on the issue of private equity options in DC plans. However, he adds, they might find cultural and liquidity hurdles should they get into that market.
“Part of that is the Wall Street/Main Street paradigm. Is the plan sponsor or the rank-and-file participant going to be as comfortable in the private equity realm which has traditionally been a realm for large pools of capital?” Other issues could include the education process of liquidity of plan participants in terms of how liquid the funds are versus trying to improve returns by leaving money longer in the investments.
Colutier adds that there might be room among broader target date funds, which have an alternative “sleeve” among the equity and fixed income portions of the investment. Something like private equity could be placed in that sleeve and “it could all make sense.”
The study, which Schroder says is in the embryonic stage, called “Private Equity in DC Plans: Retirement Industry Perspectives” is getting underway now with an expected release in early fall.
Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community.
