Exclusive: Pension funds turn to illiquid assets in search for higher yields
UK pension schemes are increasingly pumping more equity into illiquid assets, primarily driven by greater transparency around the assets and the need to diversify, according to new research shared with City A.M. today.
This research, carried out by Alpha Real Capital, is timely given the recent news that The Pensions Regulator will not proceed with a proposal to cap investment in unquoted assets to no more than a fifth of a portfolio. Such a cap would have been at odds with many pension scheme strategies, several City analysts explained to City A.M.
Some 85 per cent of UK professional pension fund investors say the scheme they work for will increase
its allocation to illiquid assets over the next three years, with 7 per cent expecting a significant rise.
Most UK pension funds already have substantial allocations to illiquid asset, around 58 per cent of investors say their scheme allocates up to 25 per cent to illiquid assets as part of their investment strategy.
Nearly two out of five (37 per cent) say they allocate up to 10 per cent of their portfolio to illiquid assets, and 3 per cent allocate more than 25 per cent. Just 2 per cent say they have no specific allocation to illiquid assets.
Transparency
The research further shows the main reason for increasing interest in illiquid assets is greater
transparency around the asset class with 79 per cent saying they are increasing allocations because of that.
“Pension funds are increasingly looking for certainty of returns through contractual cashflows, higher yields and portfolio diversification. This means growing allocations to illiquid assets,” explained Shajahan Alam, CDI director at Alpha Real Capital in the City.
However, 69 per cent said increased opportunities to invest in illiquid assets is driving interest. Around 44 per cent of those questioned said they are increasing allocations to illiquid investments because
of a growing desire to diversify their portfolio while 8 per cent say improvements in the premium for
investing in illiquid assets is driving interest.
Most investors are happy with an additional premium for investing in illiquid assets of less than 1 per cent, the research found. Around 58 per cent say they expect an additional premium of between 0.5 per cent and 1 per cent while 4 per cent will settle for less than 0.5 per cent.
However, a third (34 per cent) expect a premium of between 1 per cent and 1.5 per cent while 4 per cent look for an additional premium of more than 1.5 per cent.