The US Department of Labor’s guidance last year paving the way for defined contribution plans to incorporate certain private equity products was the green light many firms had been waiting for to further tap non-institutional capital.
The guidance allowed Fidelity International, which manages $706.3 billion on behalf of clients, to help clients incorporate the asset class into their portfolios.
“It gives support to some of the thinking that we’ve had around how we see this democratization framework,” Andrew McCaffery, Fidelity’s chief investment officer, told affiliate title Private Equity International. Rather than headwinds from regulators and authorities, there are tailwinds developing, he said.
“It’s starting to move from neutral to getting some tailwinds, that incorporation [of private equity] can be a good thing, and that there should be that opportunity set available to a broader suite of investors over time,” McCaffery said. “We’re still in the developing stages, but the signs are encouraging.”
In March, Fidelity took a step closer toward offering more private equity exposure to its clients by acquiring a minority stake in fintech fundraising platform Moonfare. The partnership allows professional investors including banks, family offices and their advisors access to private markets for their clients “in a scalable way,” according to a statement about the tie-up.
Fidelity clients can gain access via a direct feeder structure to the underlying LP/GP structure via Moonfare, McCaffery said. In time, the asset manager plans to work with Moonfare on issues such as conducting due diligence on managers and industry insight so it can better incorporate private equity into its multi-manager and multi-asset businesses.
McCaffery declined to comment on how much Fidelity plans to invest on behalf of its clients via the Moonfare tie-up.
Firms including Partners Group and Pantheon welcomed the DoL’s guidance last year, with the pair being the immediate beneficiaries of the development, having spent years building DC-compatible private equity products that offer the regular liquidity and daily reporting of a mutual fund.
Other tools have been developed to help further open up private equity to non-institutional capital, such as via ‘40 Act funds’, which permit managers to raise pooled investment vehicles via non-institutional US citizens or taxpayers. Hamilton Lane is among the firms that have launched such vehicles in recent months, with an evergreen 40 Act fund in January offering qualified US clients exposure to a mix of secondaries, direct investments and co-investments in credit and equity for a minimum investment of $50,000.
Asked whether private equity was an alpha generator or a diversification play for Fidelity’s clients, McCaffery said the firm approaches the asset class from more of a portfolio construction perspective and by looking at what investors are trying to achieve. “There is alpha, undoubtedly, but there’s also illiquidity premium and forms of premium that we shouldn’t lose sight of,” he said.
For more progress to be made, technological and regulatory issues must first be addressed, but private equity’s illiquidity premium is there for a reason, McCaffery added.
“One of the elements of democratization is not just about access to the private assets; it’s about: ‘how do you align your long-term investment goals and develop real returns on your capital; how is that best achieved?’ It’s actually to align some of that investment and time horizon of the investment more closely together.”
– Rod James and Alex Lynn contributed to this report
– Find all PEI’s coverage of the Democratization of Private Equity here.