Can a specialist service help endgame schemes manage illiquid assets?

The team combines experts from WTW’s existing transactions and private markets businesses with experience of private equity, private credit, real estate and infrastructure and the expertise to advise on all aspects of risk transfer transactions. 

While WTW has combined the expertise of the transactions team working on buyouts and the private markets team supporting schemes that wish to invest in or sell illiquids, this group’s role is focused on those looking at an imminent transaction, rather than helping schemes use illiquid strategically within their portfolios.

Liquidity dilemma

The move has been prompted by an improvement in pension scheme funding levels, presenting the option for risk transfer sooner than had been predicted.

This places schemes in a dilemma, as they may need to achieve maximum liquidity in their investment portfolios much sooner, but illiquid assets by their very nature take time for schemes to realise their value.

Ben Leach, head of private market solutions in WTW’s investments business and head of the specialist group, said: “Rapidly improving funding ratios have been a positive surprise for many pension schemes and have brought forward the timeframe to buyout for many schemes with major holdings in illiquid assets such as property and private equity.”

A number of options

There are alternatives, however. Schemes may sell on secondary markets, or negotiate with the insurer to acquire the assets as part of the risk transfer deal. 

A deferral of part of the premium payment to the insurer may be agreed, or a mutually beneficial purchase or loan agreement may be structured with the scheme sponsor. 

“Exploring the options requires a deep understanding both of the pension scheme itself and the specialist markets in question,” said Leach, and WTW has seen a 50% increase in first time sellers on the private equity secondary markets in the last year, as the market has matured considerably. Some insurers may even accommodate the transfer of illiquid assets for larger under certain circumstances. 

“But each pension scheme has its own set of unique characteristics that require tailored advice that can reach across both the secondary market and the insurer landscape in order to get the best outcome.”

Don’t get caught in a firesale

Ben Farmer, senior investment consultant at Hymans Robertson, speaking at today’s Pension Playpen webinar on illiquid assets said increased demand for illiquid from certain financial institutions, including local government pension schemes, has matured the market. However, timing remains important if schemes are to avoid being forced into a firesale to meet endgame requirements. 

“We were seeing discounts being quoted for UK property of net asset value (NAV) minus 20 per cent to 30 per cent,” said Farmer, and even then, they weren’t transacting at those prices, but at discounts to NAV into the 30s. 

“Private equity portfolios were getting 50p in the pound,” said Farmer. “These assets are all high quality – albeit small to medium sized businesses – and if you look under the bonnet, you’re basically being offered 70p in the pound for short duration, so it’s not reflective of the fundamental risks.”