For many pension fund trustees and institutional investors, the terminology around private markets can feel intimidating. Terms such as limited partners, general partners, LPAs, drawdowns, carry, hurdle rates, co-investments and secondary sales can make private markets sound more complex than they are. The danger is that when people do not understand the language, they often avoid the opportunity altogether.

That is unfortunate because private markets can play an important role in a well-diversified portfolio. They can provide access to companies, infrastructure, credit opportunities and real assets that are not available on listed exchanges. They can also help direct long-term capital into the parts of the economy that need it most, including energy, transport, affordable housing, education and other forms of social and economic infrastructure.

The question for pension funds is therefore not only whether private markets have a place in a portfolio. Increasingly, the question is how to access them responsibly.

For larger pension funds, a direct allocation into a private equity, infrastructure, debt or impact fund may make sense. These funds often require sizeable minimum commitments, sometimes in the region of R50 million to R200 million. For a large fund with the governance structures, asset consultant support and internal expertise to assess these opportunities, this may be appropriate.

For smaller funds, however, the access question is more complicated. A R50 million commitment may already represent too large an allocation to a single manager, strategy or asset class. In such cases, pooled or fund of fund structures can provide a more practical route by allowing investors to gain exposure across a broader set of underlying assets and strategies. This can support better diversification, reduce concentration risk and make private markets more accessible given the constraints of a smaller portfolio. A trustee therefore does not need to become an expert in every underlying transaction, provided the structure gives them access to credible managers, appropriate due diligence and oversight.

The legal architecture can also be daunting at first. Most private market funds are structured as limited liability partnerships. Investors are limited partners, while the manager is the general partner. The governing document, usually called a limited partnership agreement, can be long and technical. For first-time investors, it can feel like a barrier.

But that agreement exists for a reason. It sets out what the fund may invest in, how long the manager has to deploy capital, how fees are charged, how cash flows are distributed and what rights investors have if something goes wrong. It also deals with important protections such as key person provisions, conflicts of interest, valuation oversight and the circumstances under which investors may remove or replace a manager. These terms offer protection to investors over the entire life of the fund, which can be as long as 10 years.

In listed markets, investors are used to liquidity. If a pension fund needs access to funds, it can usually sell units or listed instruments and receive proceeds within days. Private markets are different because the underlying assets are real businesses and projects. One cannot sell a fraction of a wind farm, a school or a logistics business overnight simply because one investor needs liquidity.

That does not mean private markets are inherently unsuitable. It means the investment horizon and likely cashflows must be understood upfront. In some asset classes, such as private equity, liquidity increases towards the end of the fund as assets are sold. In parts of infrastructure, where assets may generate operating cash flows, there can be more regular distributions. The point is not to treat private markets like listed markets, but to match the allocation to the fund’s liquidity needs.

The same applies to capital commitments. When a pension fund commits R100 million to a private markets fund, that money is not necessarily drawn on day one. The manager calls capital over time as suitable investments are identified and approved. This can take several years because buying high-quality unlisted assets requires detailed due diligence, negotiation, regulatory approvals and careful execution.

That process is often misunderstood. Private market managers are not simply buying and selling securities from a screen. They are sourcing transactions, assessing management teams, conducting legal, tax, environmental and operational due diligence, negotiating deals, sitting on boards and actively managing assets over many years. The work is intensive because the assets are real and the responsibility is long-term.

This is also why fees need to be understood in context. Private market fees are often reduced to the phrase “2 and 20”, which can create immediate resistance. The 2% management fee typically supports the work required to source, assess, acquire, manage and ultimately exit the assets.

The 20% carried interest should also be assessed within this context. The manager only shares in 20% of the upside after investors have received 100% of their capital including the 2% management fees, back, as well as an agreed return hurdle (e.g. 10%) on such capital. In other words, carry is not a reward for participation. It is a reward for performance above an agreed threshold.

Trustees should therefore focus less on headline fee numbers and more on net outcomes. What return is the fund targeting after costs? What risks are being taken to achieve that return? Is the manager investing alongside clients? Are the key people committed for the long haul? What rights do investors have if the manager underperforms or if there are material changes in the team?

Co-investments can provide another route for larger, more sophisticated funds. These allow an investor to invest directly alongside a fund into a specific asset. They can reduce the overall fee burden and increase exposure to a particular opportunity. But they also require the pension fund to have the internal expertise to assess the asset and understand the risks. For many funds, that will not be appropriate. For those with the capability, it can be a useful additional tool.

Private markets should not be approached with either uncritical optimism or fear. They require education, patience and governance. They require trustees to ask questions and managers to explain themselves more clearly.

South Africa needs long-term capital to support growth, infrastructure and productive investment. Pension funds need diversified sources of return that are not entirely dependent on listed markets. Private markets can help bridge those needs, but only if access is made more understandable.

The industry has a responsibility to demystify the language. Trustees have a responsibility to engage with the substance. The opportunity is too important to be lost in the language.