Schemes expect substantial rise in allocations to illiquids

Some 85% of pension investors expect schemes to increase allocations over the next three years

Jonathan Stapleton
clock • 2 min read
Areas such as commercial ground rents can deliver stable returns substantially above those of gilts
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Areas such as commercial ground rents can deliver stable returns substantially above those of gilts

UK pension schemes are increasing their allocations to illiquid assets thanks to greater transparency around the assets as well as increasing opportunities and diversification benefits, research from Alpha Real Capital shows.

The real assets manager said its survey of 100 UK professional pension fund investors - conducted during August by polling company Pure Profile - found that 85% expected the scheme they work for to increase its allocation to illiquid assets over the next three years, with 7% expecting a significant rise.

Alpha's research shows the main reason for increasing interest in illiquid assets is greater transparency around the asset class, with 79% saying they are increasing allocations because of that. However, 69% say increased opportunities to invest in illiquid assets is driving interest.

Around 44% of those questioned say they are increasing allocations to illiquid investments because of a growing desire to diversify their portfolio while 8% 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%, the research found. Around 58% say they expect an additional premium of between 0.5% and 1% while 4% will settle for less than 0.5%. However, over a third (34%) expect a premium of between 1% and 1.5% while 4% look for an additional premium of more than 1.5%.

Alpha Real Capital head of client solutions Boris Mikhailov explained: "Illiquid assets offer the opportunity to earn a premium above more liquid assets which helps explain their growing popularity with pension scheme investors.

"With returns on some other asset classes squeezed, it makes sense to consider illiquid assets and nearly six out of ten schemes are already allocating up to 25% to the sector and the overwhelming majority are using illiquid assets in some shape or form."

Cashflow-driven investing director Shajahan Alam added: "Pension funds are increasingly looking for certainty of returns through contractual cashflows, higher yields and portfolio diversification. This means growing allocations to illiquid assets.

"For example, commercial ground rents and lifetime mortgage assets can deliver steady and reliable returns that match pension scheme cashflows while generating between 4% to 5% per annum above comparable government bonds. Commercial ground rents provide the added benefit of being inflation linked."

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