Why pension funds and institutions keep adding private assets

Mike Woollatt works directly with Canadian pension funds and large institutional investments as they explore the world of private assets. Woollatt is the Head of Canada for Hamilton Lane, a US-headquartered alternative investment management firm. In his work with Canadian institutions he sees a growing appetite for private asset allocations. Even after a year where many public markets outperformed private assets, he says that his clients are still looking at various private assets, in part because the nature of their returns is so attractive.

“Generally [funds] are at their target allocation if they’ve been doing this for a while, and they’re trying to get the band increased, or they’re trying to get a target band they can worth with,” Woollatt says. “Regardless, there is a pressure or push internally almost across the board to increase that allocation. We did a global survey and found that around 85 per cent of plans are looking to increase allocation to privates.”

Why private assets? Which private assets?

Woollatt explains that the question of why comes down to a few more factors than just absolute outperformance. However, he does say that across almost any time horizon, private equity, private credit, and private real assets have all outperformed their public equivalents. However, pension funds’ motivation comes from more than just the outperformance.

Woollatt offers the example of private equity, which he says is so attractive because it offers a much wider investable universe. He claims that of the global companies with over $100 million in revenue, around 90 per cent are privately held. He also says these companies offer a better governance model for growth, with less focus on short-term quarterly reporting. Investors, boards, and leadership tend to be more fully aligned and open to input from a private equity investor as well. 

Across asset classes, Woollatt says, private assets tend to offer smoother returns than their public equivalents as well. Prices aren’t spiking and falling on the latest tweet, earnings report, or snippet of Fedspeak, they tend to move in a more consistent band that usually trends upwards. Private assets often come with less liquidity than their public asset counterparts, but the long time horizons taken by pension funds make the liquidity issue into less of a factor.

In part due to those liquidity issues, Woollatt is also seeing a greater interest taken towards secondaries. These assets offer a more liquid way to buy and sell the private market assets held by other investment players. They also offer outperformance against public benchmarks, but with some additional ease of entry and exit that many pension funds have found attractive.

What about public resurgence?

While some public market assets — notably US large-cap tech — did outpace most private assets in 2023, Woollatt doesn’t see a reversal in pension fund interest back towards public assets. He attributes that view to the uncertainty that still persists in the wider macroeconomic environment and the minds of public market investors. At the same time, he notes the heavy concentration of US equity market winners being the so-called ‘magnificent seven,’ and the significant multiples they appear to be trading at.

“If I went to our investors as a private equity firm and said 90 per cent of our gains came from one per cent of our companies, and we’re holding those names at around 45x earnings, I would literally be laughed out of the room,” Woollatt says.

Canada’s private asset landscape

While the global market for private assets has grown significantly, Canada’s domestic market doesn’t represent much more than 2 per cent of the total allocation. Woollatt says that where Canada leads the globe is in its pension funds’ appetite for private assets. The so-called ‘maple eight’ were some of the first major pension funds to get into the private asset space, and their reach is now a significant factor in the global private asset market.

On the asset side, Woollatt says that there are some strong domestic names and players. On secondaries, private credit, and infrastructure there are some names and assets in Canada that he and his team view as attractive. Rather than a pure focus on Canada, however, he and his team push for asset allocation that reflects broad global diversification, which means somewhere between 60 and 70 per cent in North American private assets, 20-30 per cent in Europe, and 5-10 per cent in Asia.

Canadian pension plans have recently come under pressure from business and government leaders to invest more in Canada. Responding to the prospect of mandatory Canadian holdings within Canadian pension plans Woollatt says that the nature and details of any possible mandate will be key to determining its impact. From a pure asset allocation standpoint, however, he sees advantages in ensuring Canada’s pension plans can allocate assets as freely as possible.

“At Hamilton lane, we've spent 30 plus years building private markets portfolios for institutions all over the world. And you'll see us time and again, argue that the way to outperformance lies in strong portfolio construction, and very good portfolio construction means having abundance of choice,” Woollatt says. “Over a long period of time limiting choice is a constraint on portfolio management generally. So, from that standpoint, I think I would be probably more aligned with I see a lot of pension plans lining up saying: ‘watch out for what that leads to.’”