Trustees carry two responsibilities that can often feel at odds. They need to grow members’ pensions prudently. And they also need to fund the assets that keep communities working. Power that stays on. Quality schools that teach well, affordable housing and clinics that serve real people. This is because they have a duty to ensure that their members retire comfortably financially and socially in a dignified environment where their pensions have made an impactful contribution. Private markets sit in the middle of that tension. They promise better long term, risk adjusted returns with real world outcomes. Yet allocations remain stubbornly low and the conversation is still crowded with unease about liquidity, the long term nature, management fees and the perceived risk.
Why the low allocation?
Most hesitation starts with unfamiliarity. With the asset class no longer the best kept secret and instead becoming more mainstream, when discussions jump to investment acronyms and jargon such as IRR, DPI and J-curves, trustees default to the traditional listed comfort zone. The fix is not a sleek PowerPoint presentation with complex graphs and difficult terminology. The strongest demand is for plain language explanations of how alternative assets translate into cash flows, strong valuations and member returns. That is the right place to begin.
One of the most persistent worries is, “Will we have enough cash when members retire?” It is true that many private market strategies are long dated, however, a retirement fund does not need every rand liquid at once. The ideal approach keeps the bulk of the portfolio liquid and commits a portion to long term assets that match liabilities and earn an illiquidity premium.
Many worry that value creation may come at the expense of jobs and broader community stability, raising concerns about the human impact behind the numbers. Those concerns are not imaginary. They reflect specific strategies and cycles. The way through is not to dismiss them but to make strategy choice and manager selection the centre of the conversation, supported by clear evidence of governance, transformation, job outcomes and value creation in the underlying businesses.
When it comes to to allocation levels, regulation permits up to 15% and many global funds run north of 20%. Even a measured 5% allocation, paced over time, need not disrupt benefit payments if the rest of the portfolio is managed with cash flow in mind.
Private markets cost more to run than a passive listed allocation. They also require real work: sourcing, site visits, valuations, robust due diligence, legal structuring, active management and multi-year value plans. Management fees fund that engine; performance fees are paid only if value is delivered. The right question is not “Are fees higher?” but rather “Are we paying for skill and discipline that produces net, risk adjusted returns and measurable impact?”
A retirement fund is a long horizon investor. Benefits are paid every month but liabilities stretch decades into the future. The new two-pot system strengthens this logic. With a preservation component that members cannot touch until retirement, funds have more legroom to deploy capital into longer dated assets that compound in the background. That does not remove the need for liquidity planning. It does mean the old “everything must be liquid” mindset is not aligned to how pensions work today.
Members care about returns. They also care about whether those returns show up in places they reside. In South Africa, infrastructure and social assets are not abstract. They are power, roads, schools, clinics and data networks that shape daily life. Many municipal and regional pension funds now push for sector and geographic exposure that mirrors member priorities. A fund in a province like KZN might ask, “what investments have you made in the province?” to ascertain what real world impact was made in their part of the world? When impact reporting is credible and granular, it strengthens the social licence to allocate to private markets without treating impact and returns as a trade-off. It is a dual mandate.
Private markets also behave differently to listed assets and add critical diversification to any portfolio. Valuations are driven by growth in enterprise value and realised exits, not daily sentiment. Return paths are smoother and less correlated to short term equity noise. That matters for members who need purchasing power in retirement, not just nominal growth.
Regulation 28 is supportive. There is room for prudent allocations within sensible limits and diversification rules. The bottleneck is not the rulebook. It is intention, education and execution. Too many boards still sit under 3% despite mandates that allow more.
The environment is conducive. Regulation allows it. The economy needs it. The evidence favours it. The missing ingredient is intent, followed by action that isn’t dragged. We don’t need to aim for 15% on day one. Aim for a disciplined first step. Move from 0% to 1% or 2% with a clear plan through robust engagements with asset consultants and regular engagements with asset managers to learn more on what this asset class really looks like in practice.
A measured allocation towards alternatives will not derail liquidity. It can improve risk adjusted returns, add diversification, protect purchasing power and fund assets that matter to members’ lives.
