Q&A: What it takes for private markets to really solve your problems

We asked Emily Pollock, Client Director, Schroders Capital Solutions, how the increasing complexity in maturing private markets is affecting investor behaviour.

How have institutional demands shifted, both in light of the current market environment and growing and maturing private asset classes?

We’re looking at a world of limited resources, more complex markets, increasing regulation and blurrier lines between public and private markets. Investors are more and more focused on outcomes and their probability.

We have seen a dichotomy emerge. Institutional investors need specialisation within their private market portfolios. But at the same time, they are looking to consolidate the number of providers they use, given the expansion of the market over the two last decades.

There has been a continued flight to quality, which has provided an opportunity for even stronger partnerships. We see investors across the spectrum looking for increased engagement. The most mature investors are looking for specialist partners to approach specific problems. Smaller teams are looking for specialisation in particular areas. Newer entrants to the market are looking to build private asset programmes from scratch.

Across all stages of maturity, investors generally come to us looking for investments that deliver in three main goals:

• Returns/seeking growth

Generate returns of between 2-4% in excess of global equities. Generally this is achieved through a 10 year+ closed-end structure.

• Income

Provide enhanced income in excess of that available in higher yielding credit, or secure, long-term inflation-linked cash flows

• Sustainability & impact

Target long-term sustainability and impact (S&I) through greater control with investments in private companies and projects, while also delivering returns to outperform public market impact strategies.

What types of investors approach you for private asset solutions, and what are some of the challenges they bring to you?

We work with both institutional and intermediary investors. We have a particular focus on the defined contribution (DC) pension market, insurance solutions, wealth solutions and defined benefit solutions for the fiduciary management/OCIO market. OCIO means “outsourced chief investment officer” services and it’s becoming increasingly common.

One of the most important questions we need to answer is: “When is it appropriate to build funds and mandates which combine different underlying private assets?”

Investors come to us for a variety of reasons. Sometimes it is more investment focused and sometimes it is more structurally and operationally driven. Some of the main drivers have been the DC market opening up to private assets, the nuances faced by the insurance market, the growth of sustainability solutions, and the widening options for the wealth management channel.

Some examples of what investors have asked us to work with them on include:

• Return-seeking, diversified private asset portfolio, in an evergreen structure, suitable for the DC market
• Strategic partnerships with wealth managers that can deliver private asset investment portfolios and operations, as well as the full suite of education, marketing, and other client service support
• Solutions designed with a specific return target, alongside annual cash flow over a defined term
• A brand new programme designed for an investor looking to build out a private market impact allocation in line with their organisation’s overall S&I objectives

How do you work with your investors to design a solution?

Successful private asset investments require experienced, specialist teams, with deep networks and proven track records. Without these things, managers cannot source and execute complex investment opportunities.

We work with our partners in a collaborative process. We set key objectives for the solution needed, which include investment goals, sustainability objectives, and structural & regulatory requirements. 

After defining the key challenges and objectives we can go one step further, factoring in liquidity, diversification objectives, and risk & fee budgets. These are then mapped against internal investment capabilities and potential external partners. When designing a multi-private asset portfolio, none of the decisions can be made in isolation, so all variables need to be considered; both in build-up phase and then once the portfolio reaches steady state. 

What do bespoke private asset solutions bring to the table that traditional private asset investments can’t?

We can be more flexible. This applies to all variables, but particularly governance and structuring. We guarantee process certainty toward the whole solution, by firstly understanding how the investor is set up and wants to work together. Are they looking for a “turnkey” solution? Do they need an advisory or, discretionary proposition?

We then look to combine financial objectives - return, yield, term, cash flows, risk, liquidity and regulatory capital usage - with non financial objectives. These might be impact goals, tax & jurisdiction, regulation, and legal requirements.

By definition, each solution looks and feels different. What is consistent is that we combine all that Schroders Capital has to offer.

Investors that don’t target sustainability & impact (S&I) outcomes are becoming the exception rather than the norm. Can you give an example of impact outcomes and how private assets might be combined to deliver against a client’s specific impact needs?

We take a long-term view on value creation. We don’t believe any investor can do the same without making S&I a cornerstone of all investment decisions.

We believe that more sustainable investments will be more valuable over the long term. We use a rigorous impact management framework, proprietary impact measurement tools, and independent impact governance for strategic direction. We have adopted the International Finance Corporation (IFC) definition, of impact investment.

The IFC defines impact investment as those ”…made in companies or organisations with the intent to contribute measurable positive social or environmental impact, alongside a financial return.” This intent, contribution and measurement are required - with verification - across impact investments. We work with investors to target:

What – What outcome is the enterprise contributing? How important is the outcome to stakeholders? Which SDGs are aligned?

Who – Which stakeholders are affected by the outcome? How underserved are they?

Measure - How many stakeholders experienced the outcome? What degree of change did they experience? How long did they experience the outcome?

Contribution – Did the investment result in outcomes that were likely better than what would have occurred otherwise?

Risk - What is the likelihood that impact may be different than expected?

Investors approach us at different stages of their journey in impact investing, but often they will have some key themes they are looking to address. This might be climate mitigation or adaptation (or both), targeting natural capital & biodiversity, or social vulnerabilities.