UK pension schemes are increasing their allocations to illiquid assets in response to increased transparency about opportunities and diversification benefits.
The research shows 85 per cent of professional pension fund investors say the scheme they work for will increase allocation to illiquid assets over the next three years, with 7 per cent expecting a ‘significant rise’.
This survey, conducted by Alpha Real Capital found that 58 per cent of pension fund investors already have up to a quarter of their fund in illiquid assets as part of their investment strategy, with almost two out of five schemes (37 per cent) allocating 10 per cent of their portfolio to illiquid assets.
Only 2 per cent of schemes had not illiquid asset allocation.
Alpha’s research 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. However, 69 per cent say 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.
Boris Mikhailov, head of client solutions at Alpha Real Capital said: “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 10 schemes are already allocating up to 25 per cent to the sector and the overwhelming majority are using illiquid assets in some shape or form.”