Pantheon To Manage PE For 401(K) Investors

Until now, target-date retirement funds—designed as set-it-and-forget-it mutual funds that become more conservatively invested as people approach retirement—have usually consisted of a mixture of stocks and bonds. But beginning this summer, London-based Pantheon, a fund-of- funds firm, plans to offer a private equity option to sponsors of target-date funds available through 401(K)s. If sponsors sign up, investors could begin to gain access to private equity by the beginning of 2014, Pantheon said.

The new fund will be a modified fund of funds that will likely be called the Pantheon Global Select Portfolio. Spearheading the offering will be Michael Riak, newly hired from Verizon to be head of U.S. defined contribution.

Pantheon, which manages more than $24 billion in private equity assets, sees the possibility for managing money in target-date funds as a major growth area. Indeed, by limiting investments to stocks and bonds, target-date funds today miss out on the potential rewards (and risks) of private equity and other alternative assets, along with the benefits of diversification.

Kevin Albert, global head of business development, said his firm’s products offer “vintage year diversification, industry diversification, geographic diversification and manager diversification.” Its offering to target-date fund sponsors will also be diversified among venture capital, private debt, buyouts, growth equity, secondaries and co-investments.

The expansion of target-date funds into alternative assets does not mean 401(k) investors will be able to choose an individual fund from, say, Kohlberg Kravis Roberts & Co. “Pantheon won’t be a stand-alone private equity option,” said Albert. “It will be part of an asset allocation within a target-date fund,” he said. At the end of the day, allocation decisions will be made by the target-date plan’s sponsor, and decisions on which individual private equity funds to invest in will be made by the fund-of-funds firm, in this case Pantheon.

Pantheon’s offering won’t have its own carry fee. Albert said the management fees for such a fund would be “south of 1 percent,” with the actual fee determined by the amount of money contributed by each target-date fund sponsor. Meanwhile, the expected returns for the private equity investments would be 300 to 500 gross basis points over public market indexes.

While target-date fund sponsors may decide to dip their toes into the new Pantheon fund, Albert figures that initial allocations will be between 2 and 3 percent for funds nearing their target dates, and up to 10 percent for funds 30 and 40 years from their target dates.

But before these products can be sold to target-date fund sponsors, Riak identified two hurdles that will need to be overcome: valuation and liquidity. Since target-date funds have a daily close, a daily valuation (and a method for calculating that) will need to be worked out. Second, because people change jobs and 401(k)s are portable, there needs to be a process for closing out investments in funds with private equity assets in them. To do that, these funds need to have sufficient liquidity.  

Albert, meanwhile, suspects other fund-of-funds firms and private equity sponsors are already looking into providing similar options for the “retail” market, so he expects more competition in the space. “There will be plenty of competitors,” he said. “After a couple of years, success will ultimately depend on performance,” he said.

Tapping into the $3.5 trillion that are currently held in 401(k) plans “has the potential of adding several billion dollars” to private equity, said Albert. “It will start slow, but it’ll just snowball.”