The role of private debt investments could expand significantly for defined contribution (DC) schemes, with the potential for up to £200bn of DC assets being committed to private debt by the end of the decade, according to analysis from Hymans Robertson.

The term private debt covers debt instruments that are not publicly traded, such as direct corporate lending, special situations financing and distressed debt for firms in financial straits, and is generally accessed through closed-ended funds.

Given the fixed term these funds often have (typically around eight years) private debt often benefits from an illiquidity premium in the form of higher yields when compared with more liquid, publicly traded, assets, Hymans Robertson noted.

Hymans Robertson’s DC investment consultant, Oliver Hook, said the “heterogeneity, diversification benefits and stable income streams” provided by private debt meant private debt has a “role to play throughout DC glidepaths.”

“It is our view that private debt and other illiquid assets will improve outcomes for DC members and we continue to push for further evolution from the industry in this area,” said Hook, who co-authored the firm’s paper Illiquid investments: Embracing the Opportunities.

While the paper argued that private debt could play a greater role in DC schemes, the authors said that a change in mindset would be required in order for private debt investment to reach its potential.

The paper’s key takeaways included the need for guidance and education on private debt, covering risk and returns as well as social and environmental impacts, as well as the importance of reviewing existing strategies and exploring ways in which private debt and other illiquid assets might improve outcomes for members.

“We are on the brink of a sea-change in the DC investment landscape,” said Hook. “We have seen the UK government begin to encourage investment from pension schemes into private markets through initiatives such as the Patient Capital review, the introduction of LTAFs, and now the Mansion House Compact.

"The barriers are gradually being broken down and our ambition is that parity will be achieved between DB and DC with regards to accessing private markets.

“It is our view that private debt and other illiquid assets will improve outcomes for DC members and we continue to push for further evolution from the industry in this area.”

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