“Investing in private markets comes with its fair share of challenges,” said Rémi Tétreault, director of client solutions at Trans-Canada Capital, during the Canadian Investment Review’s 2023 Global Investment Conference.
“There’s operational complexity, capital calls and distributions. You’ve got the selection of the right general partners . . . and there’s the challenge of remaining fully invested.”
He advised defined benefit pension plan sponsors to seek strategies that provide their portfolios with the ability to respond quickly to macroeconomic shifts. “To do so, your overall portfolio has to remain quite nimble and offer liquidity. . . . If you’re looking to rebalance your portfolios, that liquidity comes at a cost. You’ve got to be able to manage around it.”
One approach for building a more manageable portfolio is to consider private equity, private debt, infrastructure and real estate allocations together, said Tétreault. “Between 2016 to 2019, . . . a lot of pension plans were looking to allocate to infrastructure, crowding the trade and lowering expected returns. . . . Under a holistic approach, you can go into another asset class allowing you to be very opportunistic.”
While this might help improve returns, the holistic approach will do little to add liquidity, he added, noting one way to improve it is by allocating a small sleeve of the portfolio to liquid markets with similar long-term expected returns and adopting an equitization strategy. “That means using derivatives to gain that exposure. If you do, the only thing you must do to have your desired exposure is to post collateral.”
However, Tétreault also noted equitization alone shouldn’t be considered a silver bullet. “There’s considerations, of course — counter party risk, in particular. . . . [But] from a risk-return standpoint, the returns [from liquid asset classes through derivatives] are similar, though slightly lower than private markets because you don’t have that liquidity premium.”
A simpler way around the challenges of remaining liquid in private markets is increasing cash reserves. “For pension plans, . . . cash is really useful,” he said. “You’re not sacrificing that much return to gain that liquidity and that flexibility.”
By ensuring liquidity in private market portfolios, he suggested pension plans could benefit from being able to make rapid adjustments. “You can reduce your overall exposure just by reducing that liquidity sleeve. Instead of being over allocated, you’re able to reallocate your resources to public markets, bond markets and other opportunities.
“There’s multiple ways to create liquidity,” added Tétreault. “If you plan in advance, then there’s no reason why you should be short.”
Read more coverage of the 2023 Global Investment Conference.