Private markets are attracting greater attention as retirement funds consider how to diversify their portfolios and gain exposure to investment opportunities beyond listed markets. This includes areas such as infrastructure, private credit, private equity and growth capital, each with its own return drivers, risk profile and liquidity characteristics.
Assessing these opportunities requires a balanced view. Like any other investment, the risks associated with private markets need to be carefully understood. At the same time, retirement funds may also need to consider the implications of remaining underexposed to parts of the economy where a growing share of investment, innovation and infrastructure development is taking place.
South African retirement funds remain heavily concentrated in listed markets. While Regulation 28 allows allocations of up to 15% to private equity and significantly higher exposure to infrastructure, research estimates suggest that actual allocations to private capital remain below 2% for many funds.
That gap should prompt a serious conversation.
The discussion therefore extends beyond the risks associated with private markets to the role the asset class could play in helping retirement funds meet their long-term obligations, particularly through exposure to energy, water, transport, digital infrastructure and growing businesses. The global financial crisis accelerated a structural migration of financing activity from public to private markets.
Banks withdrew from areas in which they had historically been the primary lenders. Private credit, mezzanine finance, hybrid capital and infrastructure debt expanded to fill the gap. At the same time, deeper private capital pools allowed businesses to remain private for longer, often capturing significant growth before they ever reached a stock exchange.
Large pension markets internationally have adjusted gradually. Allocations among some of the world’s largest pension fund systems have grown from below 5% in the early 2000s to around 20% today, with certain funds allocating considerably more.
South Africa is earlier in that journey and can draw lessons from these markets without copying them blindly. Investment strategies need to reflect the liabilities, regulatory environment and economic needs of South African retirement funds.
South Africa requires long-term capital for electricity generation, transmission, water systems, logistics networks, affordable housing and growing businesses. These are not peripheral economic activities. They determine whether companies can operate efficiently, whether communities receive basic services and whether the economy can create jobs.
This broadens the way fiduciary risk may be considered. Retirement fund members need adequate savings at retirement, but they also need to retire into a functioning economy with reliable infrastructure, employment opportunities and sustainable public services.
An investment portfolio cannot solve every national challenge. It can, however, direct long-term capital towards assets that generate returns while strengthening the environment in which members will eventually retire.
Illiquidity remains the most common objection to private-market allocations. Yet the debate often begins without first establishing how much liquidity a retirement fund genuinely requires.
For pension funds, maintaining sufficient liquidity to meet benefit payments and navigate periods of stress remains an important consideration. This does not necessarily require every asset in the portfolio to be immediately realisable.
The long-term nature of pension fund liabilities creates scope for an allocation to long-term assets, provided liquidity characteristics are considered alongside the fund’s expected cash-flow requirements.
Private markets are also far more varied than the label suggests. Private debt investments may return interest and capital throughout the life of a loan. Operational infrastructure assets can generate recurring distributions. Open-ended structures may provide scheduled redemption mechanisms. Multi-asset portfolios can combine investments with different return, risk and liquidity characteristics. Funds can also allocate across vintages so that distributions from mature investments help finance commitments to newer ones.
Illiquidity can therefore be managed through portfolio construction. In appropriate circumstances, it can also provide compensation for investors prepared to commit patient capital.
The question is not whether an asset is liquid or illiquid. It is whether its liquidity profile is understood, appropriately priced and aligned with the fund’s obligations.
Private-market structures often appear intimidating because they come with unfamiliar terminology, detailed agreements and extensive due-diligence requirements. At the same time, complexity benefits from clear explanation and should not, in itself, be regarded as evidence of excessive risk.
Building confidence across the investment value chain may help support greater engagement with private markets. This could include equipping trustees and principal officers to assess proposals, compare managers and consider how different strategies might fit within their portfolios. Consultants may also play a role by strengthening their understanding of the asset class, while clearer communication and greater transparency from managers could help investors form a more balanced view of both positive and challenging outcomes.
The industry also needs stronger data, more transparent benchmarking and more published case studies. Investors are more likely to allocate when they can see how assets have performed, how risks were managed and how returns were generated.
Competition between managers remains important, but the immediate task is larger than winning market share. The industry should first expand the pool of informed investors and build confidence in the asset class.
That will require collaboration between managers, industry bodies, advisers, regulators and retirement funds.
There are already South African retirement funds with meaningful private-market and infrastructure allocations. Many have continued investing across subsequent fundraising cycles because the assets delivered cash flows and investment outcomes that met or exceeded expectations.
Private-market adoption is unlikely to occur through a sudden industry-wide shift. It will develop as funds begin with appropriately sized allocations, build institutional knowledge, experience the cash-flow patterns and refine their strategies over time.
For South Africa’s retirement funds, any allocation to private markets should be considered on its merits, supported by sound analysis and aligned with members’ interests. This approach can create scope for a broader discussion about the role private markets could play in a retirement portfolio.
Written by Selina Nalane – Client Director at Old Mutual Alternative Investment