Embracing the opportunities - Can DC schemes reap what they loan?

Welcome to the fourth publication in our Embracing the opportunities series, focusing on the potential role of private debt in DC default design.

The use of illiquid assets in DC pension schemes has been gradually taking off in recent years and is expected to accelerate following the recent introduction of Long-Term Asset Funds (LTAFs). Following previous publications focusing on illiquid assets generally, infrastructure and private equity, we consider how private debt could be used to enhance outcomes for DC savers.

What is private debt?

Private debt refers to any debt instrument that’s not publicly traded. It can include a wide variety of sub-asset classes, including “performing” (income generating) strategies such as direct corporate lending and real asset debt, to more opportunistic strategies such as special situations financing and distressed debt. Investors typically invest through a closed-ended fund structure where capital is locked up for the fund term (typically around 8 years). Like other illiquid asset classes, private debt typically benefits from an illiquidity premium and is likely to be issued at a higher yield (and therefore additional return) compared to public markets to compensate for reduced liquidity.

The private debt opportunity is growing. Total assets under management in private debt has now passed $1 trillion (versus an estimated $370bn 10 years ago).