The majority (74%) of U.S. pension plan managers expect to see increases in private equity distributions over the next three years, while 9 in 10 (90%) of these managers say this will affect their pacing strategies, according to a survey released Jan. 23 by Ortec Finance.
Only 12% of pension fund managers expect private equity distributions to decline over the next three years, while the remaining 14% think distributions will be unchanged.
However, managers are split on what they see as the primary benefits of owning private assets.
Some 40% of survey respondents said the most important reasons for investing in private assets were their returns and illiquidity premiums. Another 34% of managers said diversification was the most important reason for investing in private assets, while 26% pointed to inflation-protection properties.
The managers also recommended various levels of appropriate exposure to private assets.
One-half (50%) of the surveyed managers said a maximum allocation of between 20% and 30% to private assets was reasonable for their pension funds. But more than one-third (34%) favored an exposure of between 30% and 40%, while 6% favored an allocation of between 40% and 50% to private assets. Only one-tenth of respondents said a maximum allocation of between 10% and 20% was optimal.
“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,” said Richard Boyce, managing director-North America at Ortec Finance, in the news release.
"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," he said.
Boyce added that a “majority of the funds in the 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.”
The survey, which was conducted in November, comprised 50 senior U.S. pension fund executives whose plans collectively have $670.4 billion in assets.
