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Private markets are becoming an increasingly important way for defined contribution (DC) pension schemes to seek long-term growth. One approach that has worked particularly well in Australia is co-investing, and Mercer believes the UK can learn valuable lessons from that experience.
What Australia has shown us
In Australia, large superannuation schemes have been using co-investments successfully for many years. Mercer has applied this approach within the Australian Mercer Super, gaining hands-on experience of how co-investments can improve outcomes for pension members.
Building on this track record, Mercer is now bringing similar strategies to the UK. As outlined in Mercer’s recent report ‘Could Private Markets hold the key to better outcomes for DC members?’ co-investments will play a major role in the Schroders Mercer Private Assets Growth Long-Term Asset Fund, helping DC members access private market opportunities in a more cost-effective, direct and practical way.
So, what exactly are co-investments, and why do they matter for DC pensions?
What are co-investments?
Co-investments opportunities are a way for large investors, such as pension schemes, to invest directly in individual companies or projects, alongside a private market fund. Instead of putting all their money into a single fund that invests across many deals, investors can commit capital directly to a specific company. This gives investors exposure to specific opportunities, often on better fee terms, while still benefiting from the expertise of experienced private market managers. Over time, investors can build a portfolio of co-investment deals, in a similar manner to private market funds, diversified by geography, sector and individual company, but with more choice and flexibility.
Why co-investments can work well for DC schemes
Co-investments can help address some of the challenges DC schemes face when investing in private markets.
- Lower fees: Fees for co-investments are typically significantly lower than the investments made in private market funds. Importantly, fees are usually charged only on money that has actually been invested, rather than on capital that is still waiting to be deployed.
- Faster returns: Because co-investments involve direct deals, capital can be put to work faster. This is important for DC pension schemes, where members may join or leave the scheme before long investment periods end. Faster deployment increases the chance that members benefit from investment growth.
- More choice and flexibility: Co-investments allow investors to choose deals based on factors such as strategy, geography, or sector. This helps build portfolios that better match the scheme’s specific goals.
- Greater transparency: Co-investing means working closely with fund managers, gaining better insight into where members’ money is going and how it is being managed.
What are the risks?
While co-investments offer clear advantages, they are not without challenges.
- Access to deals: Only the largest investors with strong, long-standing relationships with leading private markets fund managers are likely to see a wide range of opportunities. Seeing more deals allows investors to be selective, which is critical to success.
- Expertise and resources: Managing co-investments takes time and expertise, requiring dedicated global teams to evaluate and manage deals, which can be costly.
- Reputational risk: As co-investments involve direct exposure to individual deals, any high-profile failures can attract scrutiny. Strong due diligence and governance are essential.
Mercer’s experience in practice
Mercer’s experience in Australia shows how these challenges can be managed effectively. Ben Lewis, Head of Investment Proposition at Mercer, explains:
“Mercer’s extensive private markets platform and longstanding relationships with top-tier managers worldwide, give us access to attractive co-investment deals. Our experience in Australia shows that co-investments can be a powerful tool.
“At the outset, the majority of private market investments for the Mercer Master Trust and now:pensions Master Trust will be co-investments, across both private equity and infrastructure equity.
“This approach allows both Mercer and Schroder to be highly selective, investing in less than 10% of deals we analyse, ensuring only the best opportunities make it into portfolios. Our $50 billion private markets solutions platform underpins this capability, giving us broad access to top fund managers and attractive investment opportunities. In turn, this means our scheme members automatically gain access to richer, more sophisticated and more cost-effective investment solutions simply by being a customer of Mercer.”
A practical tool for better DC outcomes
Co-investments should be seen as a central part of DC pension investment strategies, not a niche option. By offering lower fees, investing money more quickly, offering greater flexibility and improving transparency, co-investments help overcome many of the traditional barriers to private market investing in DC schemes.
Mercer’s experience, both in Australia and now in the UK, demonstrates that, when implemented thoughtfully and supported by the right expertise co-investments can play a meaningful role in improving long-term outcomes for DC members.
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