Pension funds are facing major challenges with their investments. Traditional portfolios alone are no longer sufficiently reliable to cover obligations or achieve targeted returns – private market investments are an interesting addition, and a possible solution for pension funds.

Obligations almost impossible to meet with conventional systems

In the past, traditional pension fund investment portfolios looked very straightforward, with bonds and equities together with real estate providing solid returns and diversification. But times have changed – bonds have been a loss-maker in recent years, even for long-term investors, with equities generating the required returns. Despite interest-rate increases, the expected long-term yields on bonds (YTM) are unlikely to be sufficient for pension funds to meet their obligations. Common alternatives such as equities and real estate carry high fluctuation risks (equities), or are already sufficiently represented in the portfolios (real estate). Against this backdrop, does it make sense for pension funds to add private market investments to their investment portfolios in the future? There are various good reasons to do so.

“There are plenty of reasons why pension funds and private market investments create an ideal symbiosis.”

The benefits of private market investments

Pension funds can benefit from various advantages by adding private market investments to their portfolios.

  • Yield premium
    Due to the long investment horizon, private market investments can skim off a higher premium (“illiquidity premium”) and pass it on to the investor. Pension funds in particular can enter into this investment horizon due to their long commitments, and benefit from this additional return.
  • New sources of return
    While many investments in the public markets are driven by the same or similar factors, private market investments offer a wide range of investment opportunities that are largely independent of each other.  In addition, a large proportion of these opportunities are only accessible to larger institutional investors such as pension funds.
  • More accurate implementation
    Private market investments offer considerable flexibility in the choice of instruments, legal structure and/or investment horizon, allowing for specific investments in the desired source of return. It is possible, for example, to make a targeted investment in solar energy through a direct participation in a solar park (without the usual “background noise” from other business areas, as known from common equity investments by companies in solar energy).
    For pension funds in particular, this aspect can be very important when it comes to efficiently pursuing sustainability goals such as the Swiss Energy Strategy 2050.
  • A larger universe
    More and more companies remain private for longer, or are financed by private investors. This trend opens up a broader range of attractive investment opportunities for private market investors that are missing from traditional capital markets. It has also been observed that companies venturing onto the stock market tend to be less and less stable and are more often still making a loss – this development also gives the private market universe an advantage over the public markets.
  • Fewer investment errors and better returns on long-term projects
    We know from behavioural research that various cognitive biases make investors prone to bad decisions that result in lower returns in the long term. Short-term emotion-driven mistakes can be eliminated by long-term projects, which should increase the expected returns on investments.
  • Bigger impact and better risk management
    With private market investments, investors have more freedom to organise collateral and governance structures (in the form of contractual provisions or the deposit of collateral), which is almost impossible with conventional bonds and shares. This freedom allows for more targeted risk management.

Tellco already invests successfully in the private market

Tellco and its clients have recognised these advantages and have been operating for many years with diversified private market portfolios in various asset classes such as infrastructure, private debt and private equity through investment vehicles of institutional partners. This enables our clients to benefit from opportunities such as:

  • retirement apartments in German-speaking Switzerland
  • renewable energy production in Europe
  • district heating networks in Switzerland
  • company investments in start-ups with disruptive technologies
  • financing of recycling and other circular economy projects in Switzerland
  • conservative real estate financing in Australia
  • participation in the loan books of major European commercial banks
  • direct credit to medium-sized companies in Europe and the USA
  • loans to law firms for the pre-financing of legal cases

Overall, private market investments offer pension funds the opportunity to better manage the challenges of today’s investment environment, allowing for a sustainable and diversified investment strategy that meets the needs of these pension funds.

The most important summarized
  • Challenges of pension funds
  • Advantages of private market investments
Information on the topic
Tellco investment fund Dynamic Risk Management Foundation Tellco pk: Sustainability Tellco market report

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