Pension Fund Executives Split on Primary Benefit of Private Assets

• Majority of pension fund executives expect to see increase in private equity distributions over the next three years, Ortec Finance survey found
• Executives split on the primary benefit of private assets coming from the return – illiquidity premium, diversification, or inflation protection

In recent decades, investors have turned to private asset classes, such as private equity, for various benefits including increased return and diversification. Now looking forward, almost three in four (74%) pension fund executives believe distributions for private equity will increase over the next three years, and almost nine in ten (89%) say this will affect their pacing strategy, according to a new global survey* from Ortec Finance, a leading global provider of risk and return management solutions for pension funds.

The survey targeted senior pension fund executives in the UK, US, the Netherlands, Canada and the Nordics whose funds collectively manage $1.451 trillion in assets.

Distributions for private equity – the means by which private equity funds return capital to investors, which are paid when fund managers realise their investments in underlying companies or assets – have been low over the past years. But out of the 74% who expect these to be higher over the next three years, nearly half (46%) say they will be much higher with 28% saying they will be slightly higher. Just 8% expect them to be lower and 18% expect they will be unchanged. This suggests pension executives expect to realise the return benefits of their private asset investments.

Along with understanding distributions, pension executives have to strategise how much to invest into private equity and other private assets. Almost nine in ten (89%) say their views on distributions have an impact on their pacing strategy, which is the consistent approach to committing capital to private investments with the goal of reaching a long-term target allocation. Of these, around a third (31%) say their views of distributions will have a considerable impact, with 58% saying it will have a slight impact. Just over one in ten (11%) say it won’t have an impact on their pacing strategy.

For pensions, investing into private assets creates liquidity constraints for their funds. However, nearly half (46%) of pension executives said the most important reason for investing in private assets was their returns and illiquidity premiums, the Ortec Finance survey found. But in addition, around two out of five (37%) identified diversification as the most important reason for investing in private assets while 17% pointed to inflation protection.

Despite the benefits, the pension executives surveyed see different levels of optimal exposure. The largest group of executives, over half (52%) of those surveyed, deem a maximum allocation to private assets of between 20% and 30% reasonable for the fund they manage. For over a third (36%) of those surveyed this was between 30% and 40%, and for over a tenth (12%) this was as much as between 40% and 50%. Under a tenth (8%) of pension executives surveyed said that their fund’s maximum allocation to private assets is between 10% and 20%.

Marnix Engels, Managing Director Global Pension Risk at Ortec Finance reflects on the tradeoffs made for the benefits of private assets including private equity: “We see with plans that navigating their private equity distributions and commitments is representative of the balancing act between liquidity and the varying pros of private asset classes. The survey points towards a growing belief that distributions for private equity are expected to increase in the future, which is a positive expectation showing that plans are about to reap the benefits from illiquidity premium.

“A majority of the funds in the global survey allocate at least a fifth of their portfolio into private assets, so we can assume that for now private assets are firmly established on the pension plan investment agenda given their support in pension returns, diversification, and inflation hedging. To balance the costs of these three benefits, funds can model their excess liquidity constraints against several economic scenarios to ensure the benefits of private assets don’t jeopardize the overall flexibility of the fund.”

Ortec Finance provides solutions for Defined Benefit and Defined Contribution pension funds to help address issues including low yields, complex liabilities, increasing investment performance analysis demands, and climate change related risks and opportunities.

For more information on its software and services go to Pension Funds | Ortec Finance