The really interesting conundrum (to me, anyway) is that there’s a solution to this which is staring us in the face yet seems to be on nobody’s radar screen: investment trusts (the mention of an investment vehicle takes me into financial promotion territory and this is an open blog so I should tell you that there is no guarantee in an investment trust and you may get back less than your original investment).
For the uninitiated, investment trusts are closed-end vehicles, usually listed on a stock exchange, in which investors buy and sell shares in the trust rather than the underlying assets. They are therefore ideally suited to private equity investments. A number of trusts are already going down the public-private route, prompted by our new world of ‘capital-lite’ growth companies in which many stay private for longer. Traditionally, investors’ main objection to investing in investment trusts is that they are subject to the balance of supply and demand for the shares, meaning that the price can trade at a discount or premium to the value of the underlying assets. Large investors worry that they won’t be able to find buyers if they want to sell their shares and so will end up offering them at a hefty discount. Both of these challenges can be mitigated; there are now several trusts which are large enough to have meaningful liquidity in the secondary market (how nice to see the secondary market being used for the maturity transformation purpose it was originally designed for); and many more trusts actively issue or buy back shares to balance market demand. DC investors typically have investments horizons which are measured in decades, and they don’t all retire at the same time. So, at least for large trusts there is probably enough liquidity to accommodate a decent allocation from the average DC scheme, providing built-in exposure to private equity.
The summary of all this is that whether it’s a large institutional portfolio investing through special purpose vehicles, or smaller scale cashflows through investment trusts, there is a strong case for overcoming the public-private divide. This would allow more investors to participate in the widest set of growth and innovation opportunities at a sensible price. I think this might be what our industry originally did, before we made it so very, very complicated.