Michael Riak, head of U.S. defined contribution at Pantheon Ventures, said he has met with more than 100 sponsors of defined-contribution (DC) retirement plans, including both corporate and government sponsors, since he joined the firm just over two years ago. There is “tremendous interest in talking about it,” said Riak. His pitch has been for these sponsors to add a private equity component to their custom target-date retirement funds – popular set-it-and-forget-it funds whose investments grow more conservative as investors approach retirement age.
Riak reported that about a dozen of the sponsors he’s met with are “really interested” in signing up for the product, about six are “looking very, very closely” at it, two are “pretty close” to signing up, while a couple of existing Pantheon clients are also “very excited” about it. “We believe [that] shortly we’re going to have our first client up and running in a DC capacity,” said Riak, who prior to joining Pantheon Ventures spent 10 years as director of savings and affiliate plans at Verizon Investment Management Corp.
Meantime, the private wealth unit at Pantheon Ventures continues to create private equity products aimed at accredited investors. The products have investor-friendly features, such as low minimum commitments and quarterly redemptions (up to a cap) after an initial lock-up period. A public filing references the future possibility that the firm may register securities for related feeder funds under the 1933 securities act.
At stake is nothing less than the question of whether everyday investors will have access to the same kinds of alpha-generating investments as institutional investors. Just 19 percent of U.S. workers have access to defined-benefit plans, according to Cerulli Associates, as more and more organizations abandon them for defined-contribution plans in which employees pick and choose their own investment products.
Speaking at the Buyouts Chicago conference in late June, Riak pointed to CEM Benchmarking statistics showing that in the 17 years ending in 2013 defined-benefit plans in the United States outperformed defined-contribution plans by 1.1 percentage points per year, 7.9 percent to 6.8 percent. That is due in part to their allocation to alternative investments such as private equity. Over a 35-year period an employee investing $5,000 per year at the higher rate of return would end up with $986,430, compared with $760,150 at the lower rate of return.
People hold more than $3.5 trillion in 401(k) plans, one of the most popular DC plans, but the Department of Labor estimated the average 401(k) balance last year at just $74,871. “Folks, that is not going to do it,” Riak said at Buyouts Chicago. “There has to be more alpha generation that’s going on in DC plans.”
Pantheon Ventures would argue that alpha generation could come from an allocation to private equity. In the custom target-date retirement funds the allocation might range from 3 to 4 percent for funds close to the retirement date to as much as 10 percent for those still decades away. Investments would include primary funds, secondaries and co-investments in strategies ranging from venture capital to buyouts, anywhere in the world. As reported earlier, Pantheon Ventures plans to charge a management fee of less than 1 percent on its target-date-fund product, organized as a collective investment trust, and no carried interest.
Pantheon Ventures has faced a raft of challenges in getting the product off the ground.Three of the toughest are providing liquidity to investors who want to sell their interests in the target-date funds; providing accurate daily valuations; and, as a means to minimize the J-curve effect, getting money in the vehicle to work quickly. Riak said the firm has been able to address all three. Pantheon offers liquidity in part by putting aside some percentage of its assets in tradable securities tied to the performance of the S&P 500; it can also sell private equity assets on the secondary market to generate cash should plan sponsors wish to exit the product. It supplies daily valuations through a proprietary algorithm that takes into account public market movements, economic developments and other factors. And it gets money to work quickly in part through making early investments in secondaries and co-investments.
Of course, the ultimate test of the product will come when investors in DC plans get their first taste of private equity through target-date funds. Could Pantheon Ventures have its first DC plan sponsor client by year-end? “Hopefully,” said Riak.
Action Item: Reach Michael Riak at email@example.com.
Sidebar: ‘Is Private Equity Delivering?’
That’s the name of a study published this month by Pantheon Ventures comparing the performance of U.S. buyout funds with that of the S&P 500 index from 1990 to 2006. Using data from Preqin, authors Nik Morandi, global head of portfolio strategy and research, and Andres Reibel, a member of the firm’s research team, found that top-quartile U.S. buyout funds beat the S&P 500 by 4.9 percentage points per year, while average funds beat the S&P 500 by 1 percentage point per year.
(Update: The original story has been amended to protect a source of information.)