UK pension funds should tap secondaries for growth

Secondaries funds can give UK pension funds quick access to accelerated liquidity, instant diversification and high-quality managers, according to Cambridge Associates.

Pension funds in the UK should invest in secondaries funds to access new sources of growth amid the current low-yield environment, according to advisory firm Cambridge Associates.

“Depending on a pension fund’s private investments portfolio, secondaries can be an attractive sub-strategy due to their accelerated liquidity profile and the instant diversification they provide,” Dan Aylott, a senior investment director who focuses on private investments told Secondaries Investor.

For a pension fund that is new to private equity, secondaries funds can provide the fund with quick access to high quality managers in the underlying portfolios and generally have lower fees than primary funds, Aylott said.

A July report by the firm highlighted specialist private equity funds as one of three relatively untapped private investment strategies UK pension funds could look at for growth opportunities. The other two were co-investments and direct lending opportunities.

Compared with the US, where pension funds and university endowments have higher exposure to private equity and use the secondaries market to build up, sell and adjust their portfolios, UK and European pension funds lag behind in private equity investments. Pension funds in the UK should be allocating more to private investments in general, Aylott said.

Secondaries funds return between 1.4x and 1.7x to the clients Cambridge Associates advises.

Globally, public pension funds have been active as sellers on the secondaries market, accounting for almost a third of transaction volume during the first half of this year, according to a July report by Greenhill Cogent.

Cambridge Associates looks for secondaries funds that are different in their market approach when advising clients, Aylott said.

“Perhaps they have different strategies and are not just buying plain vanilla LP positions, but may also be investing in some GP-led restructurings or buying tail-end GP portfolios or using clever structuring to boost returns,” he said.