Private Capital’s Crossroads: Smart Allocation or Strategic Misstep?

A Mispriced Opportunity with Risks Few Are Pricing Properly

The UK’s recent Mansion House Accord represents a bold attempt to re-energise growth and returns in the pension landscape. Backed by the Treasury, 17 of the UK’s largest pension fund managers have pledged to allocate at least 10% of default defined contribution (DC) assets to private markets by 2030, up from near-zero levels today. That’s a potential £50bn reallocation — and a significant shift in how pension capital is deployed.

There’s a clear political and economic incentive behind this push: stimulate domestic investment, support UK growth, and tap into an asset class that has, historically, outperformed.

But scratch the surface, and it’s not that straightforward.

Private Capital’s Appeal — and Its Blind Spots

Private equity (PE), private credit, and infrastructure investing have delivered compelling returns over the past two decades. According to a 2022 academic study, global private equity funds have posted IRRs in the low to mid-teens, comfortably ahead of public equities like the S&P 500’s ~10% average return.

Firms like KKR boast annual net IRRs of 12–14% across private client strategies — evidence that private capital can offer a genuine illiquidity premium. Meanwhile, the size of the global private capital industry has ballooned to $24.4 trillion, doubling in just a decade.

But recent results haven’t been as inspiring. One high-profile case: the St James’s Place Diversified Assets fund, launched in partnership with KKR in 2018. The fund, available to UK retail clients, has returned just 0.6% over the past 12 months — underperforming both the FTSE 100 (up over 8%) and cash equivalents (which returned c.5%).

This isn’t simply a one-year blip. The fund has persistently underperformed since inception — raising serious questions about liquidity trade-offs, cost structures, and whether the retail packaging of private assets is diluting the actual investment thesis.

The Real Motivation Behind the Policy Push

In my view, the current enthusiasm for private capital is being driven by a mix of:

• Backwards-looking performance: While historical PE returns have been strong, more recent vintages face higher entry multiples and tighter exit conditions.

• A structural funding gap: Rising interest rates have increased the cost of debt, making the traditional PE model more expensive to operate. Meanwhile, institutional backers like Canadian pensions and US endowments are pulling back.

• Retail and DC capital as the new frontier: Retail investors and UK DC pensions represent a huge, under-tapped pool of long-duration capital. But are they being sold opportunity — or used as a liquidity lifeline?

There’s also a conflict of interest lurking beneath the surface. Private capital firms stand to gain handsomely — not just from carried interest, but from management fees that can reach 2% annually, with layered performance charges. Compare that to a public equity tracker at 0.1% total expense ratio.

Liquidity Mismatch and Performance Drag

The St James’s Place/KRR fund offers daily liquidity — which, to meet redemptions, requires it to hold around 30% in cash. This is arguably the opposite of what private capital investing is supposed to be about: locking up capital in illiquid, long-term opportunities to earn a premium.

Instead, this hybrid model may be eroding returns, failing to capture the true upside of private deals, and exposing investors to the worst of both worlds — high fees, low liquidity, and mediocre returns.

This also highlights the difficulty of retail distribution in private markets. As regulators and fund managers look to offer smoother liquidity to mainstream investors, the very structures designed to protect them may be harming long-term outcomes.

MY OUTLOOK: Long-Term Opportunity, But Not for Everyone

I believe private capital does have a role in a diversified portfolio — but not at any price, and not for every investor. For those with long horizons, tolerance for illiquidity, and access to top-quartile managers, the space remains attractive.

But shoehorning this asset class into daily-dealing retail wrappers, or pushing under-resourced DC schemes into complex fund structures, could create more harm than good.

Policymakers must also tread carefully. It’s one thing to incentivise investment into UK growth; it’s another to implicitly coerce pension schemes into bearing illiquidity and valuation risk for policy goals. As Aviva CEO Amanda Blanc rightly put it, mandating asset allocation would cross a “red line.”

Final Thoughts

Private capital is not a silver bullet. It’s a powerful tool — but like any tool, it must be used appropriately. Higher returns are not guaranteed, and the illiquidity premium can be eroded by high fees, poor governance, and subpar execution.

If the UK wants to foster a thriving private capital ecosystem, the focus should be on manager quality, fee transparency, and aligning incentives — not simply funnelling capital into the sector on the hope that history repeats.

For now, private markets remain a compelling — but complex — part of the portfolio. Treat them as a growth engine, not a magic solution.