The multinational company launched a working group, which will evaluate opportunities in the public-private equity space.
In a new paper, Willis Towers Watson (WTW) has stated that while there are strong structural tailwinds to support the continuing rise of private equity in institutional portfolios, the private equity sector needs to evolve how it structures its investments, to fully capture its growth potential.
One of the focus areas for the new working group is the potential for a new type of passive or beta offering within private equity that allows asset owners to access and hold the investments in a cost-effective way.
The group believes that with many private businesses being well established with strong management and cash flows, they are well positioned to compound earnings over a longer time horizon than current fund structures allow.
Andrew Brown, head of private equity research at WTW commented the model in the private equity space “hasn’t changed in the last few decades”.
“Whilst that structure has performed well over this period, we are increasingly seeing capital moving away from defined benefit pension schemes into defined contribution, so there is a need to innovate in order to identify a structure that enables a wider investor base to access opportunities,” Mr Brown said.
“This could mean relooking entirely at the way that some private equity funds are structured. For example, specific fund terms can mean that private equity managers may be under pressure to sell out of investments prematurely in order to facilitate further fundraising; whereas long-dated funds and evergreen structures could be a way of mitigating the need to do so.
“This could facilitate the creation of a form of ‘buy and maintain’ private equity that may better suit an investor with a longer-term investment horizon.”
Michael Slaven, associate director, equity research for WTW in Australia added there is growing interest from asset owners for accessing private equity through co-investments.
“The aim is to both reduce fees and to take a more targeted and deliberate approach to building private equity portfolios designed to achieve a specific set of objectives,” he said.
WTW has also issued a challenge to private equity managers to improve their ESG standards. The advisory firm has developed a set of guiding principles aiming to help them formulate their own frameworks, including carbon emissions generated by investments and net-zero targets.
Mr Slaven commented “more can be done” on sustainability.
“We believe this transition to a net zero target is going to be a key source of alpha in the coming years,” he said.
