According to Jo Shaples, chief investment officer for Aon’s DC solutions, joining the Mansion House Compact was a “continuation of a broader direction of travel” for the firm.
She said: “Over the last few years, we’ve seen increased interest in [private equity] and we started to see it actually becoming possible for the first time now that there’s been a few schemes who have done it.”
Sharples pointed out that the market is “opening up” and there are more, better, products available.
She said: “With that, we took a view to making an allocation with one of our defaults. We thought that long term if we can get it in, it is really good for our members and good for returns.”
The 5% private equity target dictated by the compact will form a part of wider privat assets strategy for Aon, Sharples said.
She pointed out that private equity sits at the “higher risk, higher return end” and because it is so new you can’t just jump into it, and it has to be a part of a broader strategy.
She said: “As part of this journey I can see, particularly taking to account client feedback, you have to get clients comfortable with the fact that this is a good idea, that it will work and it is worth paying a little bit more for.”
Shaples added that if “dip your toes” in the private equity and it works and produces good returns, it will open up for “much bigger allocations and less scepticism around fees”.
Aon already has some private markets exposure, in the form of direct property in the default fund, which Sharples said delivered “some good returns” but has come under pressure recently due to market conditions and the gating of a lot of property funds in the UK.
She said: “It’s been a good learning experience for the industry to actually have to deal with that and work out the good and bad things to take from there and actually learn from that, that you can take when you do a bigger allocation because you will get funds that gate and there will be times when you can’t get your money out. “
For private equity allocation, Shaples said it will be a case of building up allocation to private markets and then over time looking to introduce private equity.
At the moment, Aon is looking at allocation to private debt, infrastructure, property and also insurance linked securities. She said they come with “different liquidity profiles”, adding that debt and insurance linked securities are at “much more liquid end of the spectrum” meaning you’ve got natural cash flow coming off.
She said: “We are looking at all of those and effectively ranking them to see which ones are going to work best. We’ve got a list of probably 30 managers who are keen to do something and it’s a case of which ones are going to be the better ones.”
But for private equity, Sharples said there is a need for a private equity vehicle.
She said: “At the moment if you want private equityonly vehicle, you don’t have much choice.”
Sharples said she is not aware of any vehicles that can do that now, and how long it will take for any to surface, but “that’s the sort of innovation that we need to see”.
And while British Business Bank is developing a vehicle at the moment, Sharples said that it is not something that is ready to take the money now. She said: “That could easily take a few years, in the interim that’s when you start to build up a notion and test some of the operational stuff around [private equity investing] and build some track record”.
Sharples added that Aon is currently looking at picking specialist managers for each area of private markets but it will probably be 12 to 18 months before it can make a first allocation to private assets.
She said: “It might include productive finance but not necessarily private equity. Private equity will follow once we’ve got potential vehicles. It will take some time to get up and working.
Mansion House Compact explained
The Mansion House Compact is a commitment announced by the UK chancellor Jeremy Hunt in his keynote policy speech at the Mansion House, the official residence of the Lord Mayor of London, on 10 July 2023.
It calls on DC pension schemes to boost investment in UK unlisted equities.
As part of the compact, signatories are expected to allocate at least 5% of their default funds to unlisted equities by 2030.
Currently, the DC schemes’ investment in UK unlisted equities is under 1%.
According to the chancellor, if the UK’s DC market follows suit, this could unlock up to £50bn of investment into high-growth companies by that time.
The initial signatories of the compact included Aviva, Scottish Widows, Legal & General, Aegon, Phoenix, NEST, Smart Pension, M&G and Mercer. Since then, Aon and Cushon have joined as signatories of the compact.
