As a defined contribution (DC) pension fund provider, we aim to help our clients invest for the best possible outcomes. In our view, this means not only finding great investment opportunities, but also ensuring that these are accessible to schemes and members.
Much has been said over the past several years about the potential benefits of private market investments, such as portfolio diversification and greater, long-term net of fees returns. Indeed, at Legal & General we have been investing in private markets for over 40 years and we believe they can be a valuable part of a portfolio. Defined benefit schemes (DB) have been taking advantage of these opportunities for decades. However, largely for operational reasons, up until recently, DC schemes have generally lacked access to them.
With the advent of the Long-Term Assets Fund (LTAF), private market investing has been opening up to more DC members. But, while LTAFs have certainly addressed some of the challenges faced by DC schemes, we believe there are still obstacles to making these investments truly accessible to DC. Recognising this and being in a position to address these difficulties with some of our existing strategies and expertise, we have structured the new L&G Private Markets Access Fund specifically to help mitigate against some of the challenges with liquidity, operations, valuations and taxation.
Enabling liquidity
DC schemes have continuous ebbs and flows of capital, so as well as the operational need for daily valuations, they require daily dealing. This can sometimes be problematic for the managers of a stand-alone LTAF who, to fund standard daily liquidity demands, may have to make decisions about which private market assets to dispose of, or simply hold a large allocation of cash within the fund. This can mean that investors' capital isn't working as hard as it could be.
We've addressed this by building our solution a little differently. We are offering an investment-focused DC solution providing total portfolio management within a unit-linked PMC fund, which offers daily dealing. Our LTAF, which accesses a diverse range of private market assets, sits inside the PMC fund. We also hold complementary public market investments within the PMC, but separately from the LTAF. These easily-traded assets enable us to satisfy ‘noisy' daily dealing requirements driven by payroll and rebalancing, whilst not needing to hold large quantities of cash or make a forced sale of private market assets.
Further, one of the concerns some DC clients have is how they will divest in the event of, for example, a large asset allocation switch. In this case, we have a nine-month notice period and have structured the portfolio so that sufficient private market assets can be liquidated in this time frame.
Operations and valuation
DC platforms are accustomed to daily liquidity requirements. This means that LTAFs which don't provide such a facility will require infrastructure and administration changes to be made to the platforms before they can be placed on them. As the L&G Private Markets Access fund is a PMC structure, many of which we already have on DC platforms, this should make for a smoother transition when adding the fund to platforms.
As already mentioned, there is a need for daily valuations. Individual members need to be able to see their up-to-date valuations and not stale pricing. The underlying LTAF is daily priced, therefore net asset value (NAV) updates from any private markets funds are fed through to it on a timely basis. We are also able to fair-value adjust third-party fund pricing, and we have put in place valuation checks, as well as regular formal reviews through the relevant internal oversight functions.
Conclusion
There are many reasons to use L&G for private markets investing, not least our size, scale and experience. However, without the requisite ability to invest and divest easily and efficiently, the benefits are, we believe, somewhat mitigated. In our view, this new, innovative structure is a critical milestone in the evolution and democratisation of the private markets asset class.
Tax implications
Our unit-linked life fund structure provides a range of well-established tax benefits to UK DC investors. The LTAF will be structured as an Authorised Corporate Scheme (ACS), therefore allowing efficiencies from a tax perspective to flow through while preventing unrecoverable corporate taxes from accruing within it.
Important information
The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Past performance is not a guide to future performance. It should be noted that diversification is no guarantee against a loss in a declining market. Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.
The details contained here are for information purposes only and do not constitute investment advice or a recommendation or offer to buy or sell any security. The information above is provided on a general basis and does not take into account any individual investor's circumstances. Any views expressed are those of LGIM as at the date of publication. Not for distribution to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation. Please refer to the fund offering documents which can be found at https://fundcentres.lgim.com/.
This financial promotion is issued by Legal & General Investment Management Ltd. Registered in England and Wales No. 02091894. Registered office: One Coleman Street, London EC2R 5AA. Authorised and regulated by the Financial Conduct Authority.
Legal and General Assurance (Pensions Management) Limited. Registered in England and Wales No. 01006112. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, No. 202202.
LGIM Real Assets (Operator) Limited. Registered in England and Wales, No. 05522016. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 447041. Please note that while LGIM Real Assets (Operator) Limited is regulated by the Financial Conduct Authority, it may conduct certain activities that are unregulated.
Legal & General (Unit Trust Managers) Limited. Registered in England and Wales No. 01009418. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119273
