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ALTERNATIVES

Illiquidity premium getting harder to find, European pension executives told

Joaquim Levy of the World Bank Group
Joaquim Levy of the World Bank Group

Pension funds searching for an illiquidity premium may already have missed the boat, fund executives warned Thursday.

But opportunities might be found in emerging markets when it comes to infrastructure.

Executives gathered at the World Pensions Council's investment forum in London to discuss opportunities in the persisting low-yield environment. They said while private assets, infrastructure and real estate have a role in garnering returns globally, the opportunity in developed markets might be fading already.

One European fund executive, who could not be identified because of the Chatham House Rule that promised anonymity for participants to foster candid opinions, said all asset classes should be placed into a hierarchy and ranked according to risk return profiles at all times.

“Pension funds should have been looking at infrastructure (a) long time ago, not only after interest rates and yields went down. And (as a) result, (the) illiquidity premium, I believe, has already gone down,” he added.

But a U.K.-based pension fund executive said the opportunity will last as long as a trading counterparty could be found. “As a long-term investor with an investment horizon of 10 years, we believe that infrastructure valuations are sensible and over 10 years still offer better returns than cash or fixed income,” he said.

Panelists also named emerging markets infrastructure among top sources of potential return in the current climate.

In a separate keynote speech, Joaquim Levy, chief financial officer and managing director of the World Bank Group, said the opportunity in emerging markets infrastructure is as vast as in developed markets and could be valued at some $100 billion. And the projects in emerging markets are ready for pension fund investment now, while in developed markets there is a shortage of supply, and it could take time for further demand to appear.

As one example, he cited “another U.K.-sized electricity market” that is available now in India. He did not go into further detail.