due diligence

Managing risks in private market investments for pension funds

Pension funds around the world are increasing allocations to private markets, in a bid to drive greater returns and diversify portfolios. To combat the opaque nature of private markets, pension funds need a robust due diligence solution to help them get the reassurance they need.

The growing global population of retirees means that public and private pension funds are under increasing pressure to generate returns. Globally, pension funds manage around $56 trillion US dollars AUM and counting.

Historically pension funds have invested more heavily in public markets, but in say the last 10 - 15 years there has been a shift towards private markets. In part due to the potential for higher returns, as well as the increased diversification that private markets can offer.

The main aims of pension fund investment teams are usually to preserve capital and generate income. Diversification of the investment portfolio can help to achieve these aims and private markets can offer a good source of diversification, as they are not highly correlated with public markets.

In 2022, pension funds globally invested around $15 trillion in private markets. This is expected to grow to $20 trillion by 2025, so is still a major growth area.

One of the largest pension funds in the world, the California Public Employees' Retirement System (CalPERS), is also the largest investor in private markets and has been doing so for over 20 years. A significant dip in net returns reported by CalPERS in June 2022 has encouraged even greater levels of investment into alternative assets and particularly private markets. Proof that in troubled times, private equity, private credit, real estate and infrastructure can help institutions diversify, hedge against inflation and offer some price stability.

It's not just pension funds in the US that are investing in private markets, in Europe, the largest pension fund, the Swedish National Pension Fund (AP Fonden) started investing in private equity in 2011 and has been increasing its allocation ever since. In PEI's Global Investor 100, AP Fonden is reported as allocating a whopping 86% of its total assets into private equity.

So pension funds play an important role in the private markets and are one of the main sources of capital for private companies. Again the PEI Global Investor 100 reported that of the top 100 investors in private equity, 64 are public or private pension funds.

However, investing in private markets comes with its own set of risks. One of the biggest risks is the lack of transparency around how funds and general partners are performing, which can make it difficult to assess the risks and potential returns of their investments.

Above all, due diligence is key. With software like Dasseti Collect, pension fund investment teams can gain full transparency into their portfolios, both at a GP level, and through the GP, to portfolio company level. Dasseti helps investors see how funds and GPs are performing, and reduces the risks associated with investing in private markets. Last year we covered the key questions to ask when performing due diligence on private equity funds, which remain relevant today.

Any data point can be captured and analyzed, which means that even very hard to obtain information, such as ESG related data - eg carbon emissions scope 1, 2 and 3, or DEI data relating to gender pay, board diversity or ethnic diversity of a GP or portfolio company can be requested and aggregated into simple graphs, charts or tables. Read about the challenges of ESG data collection in private equity.

Get in touch to find out more about how pension funds around the world are working with Dasseti to perform detailed due diligence on their private equity, venture capital, real estate and private debt investments.

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