Defined Benefit (DB) pension schemes have entered a new era of complexity as they try to manage, or exit, their allocations to illiquid assets. Now is an opportune time to review and adjust illiquid asset allocations, and a proactive approach will deliver value and speed up future transactions.
Scheme sponsors and trustees considering the future of their defined benefit pension scheme are now faced with a choice of executing a buyout transaction or continuing to run the scheme, a strategy increasingly referred to as ‘run on’. Whether targeting buyout or running on, the issue of how to handle illiquid investments has become an increasingly prominent topic for investment agendas.
Overcoming Barriers to Selling Illiquid Investments
Many schemes nearing their endgame still hold an allocation to illiquid assets - and, for many, they are holding large and overweight positions. That can be an issue in itself but is especially relevant when schemes are looking to move to an insurance-based solution.
As a result, there are key questions to consider which need careful thought: should you try to sell all your illiquid assets together as a package deal, or are you better isolating the assets and approaching niche buyers in each individual asset class?
Additionally, there are an increasing number of sale processes to weigh-up, from working with traditional brokers to making use of specifically developed trading platforms.
“At Aon, we have helped clients to sell more than £2.25 billion of illiquid assets across over 100 fund holdings during the last five years.”
Jeffrey Malluck
Associate Partner
We favour working with independent third-party brokers, selected after extensive research, and utilising our experience to develop bespoke approaches. These brokers have a deep, global investor base and strong buyer networks. As a result, they understand what buyers are looking for – and, they are well-positioned to deal with distressed assets and those that require complex structuring.
Delivering Value to a £300m Private Markets Transaction
By drawing on our network of select, specialist brokers to facilitate the sale of illiquid assets, we were able to drive value and speed up transaction time.
In one recent case, we supported a £2 billion corporate pension scheme to sell around £300 million in private market assets. The scheme’s trustees were looking to buy out in the medium term but needed to sell some of their significant illiquid positions first. The process took three months, rather than the typical six to 12.
By liaising with our panel of preferred brokers, we were able to secure indicative pricing, fees, and a go-to-market approach, in a much shorter timeframe than usual.
“Our broker supported the client on two rounds of bidding, and finally achieved pricing of 16.5% discount to NAV – around a 10% improvement against initial expectations.”
Jeffrey Malluck
Associate Partner
These transactions allowed the pension scheme to reposition its portfolio and create some liquidity, in preparation for a buyout in the future.
Preparing for Future Transactions
For schemes not looking to sell their illiquid assets straight away, it pays to be proactive to ensure value is being captured and transactions can be executed more efficiently in future. We are supporting investors to identify whether they should retain assets or accelerate liquidation, depending on their position. We analyse where there might be value in a client’s illiquid portfolio, considering where liquidity can be released and profits taken, so that a client can reinvest in other investments or plan towards the endgame.
Meanwhile, we work closely with Aon’s insurance broking team to place Warranty and Indemnity insurance, which helps speed up transactions and mitigates some of the post-sale risks involved, for example in secondary market transactions.
Holding Illiquid Positions
For schemes opting to run on, illiquids can still have a place in the portfolio – and, for investors with a longer time horizon, there are good reasons to retain, or even increase, allocations to illiquid assets.
Currently, there are some attractive market opportunities available in areas such as private credit and infrastructure, which offer an attractive yield and equity-like returns with lower volatility. For some, secondary market purchases could deliver significant value. Real estate, for instance, was hard hit in the aftermath of the Covid-19 lockdowns and thus now has potentially attractive opportunities for investment.
Higher asset values and improved secondary market pricing mean there are attractive opportunities whether investors are seeking to sell, trim or buy illiquid assets. Now is a good time to review current allocations – and a proactive approach to managing and reviewing these assets will be key to securing value and timely transactions.