Harvesting the Potential of Private Investments

In the November 2017 issue of Benefits Magazine, which covers benefit issues affecting multiemployer, single employer and public plan representatives, senior investment director and investment actuary in Cambridge Associates’ pension practice, Alex Pekker, contributed an article highlighting the potential for private investments in a pension’s investment portfolio.

Pekker explains that private investments could be a key driver of improved return for many plans, and could be particularly important in the years ahead given projected low returns for most traditional asset classes over the next decade. Key takeaways from the article include:

• For a host of reasons, returns for domestic and international equity, and for U.S. government and corporate bonds are expected to be challenged in years ahead, with as low as a 4% ten-year compound return projected for a 60/40 simple portfolio;
• Private investments, both private equity and private credit, have historically outperformed their public counterparts by considerable margins and thus could play a pivotal role in helping plans become more solvent and fund benefits for current and future retirees;
• Private investment strategies are both opaque and diverse, representing a varied range of objectives and attributes;
• Many plan sponsors are under-allocating to private investments and may be giving up on critical return potential due to overestimating their plans’ liquidity constraints;
• Private investment returns vary widely; the difference between top and bottom quartile managers is 4 to 5 times higher than for public market equivalents. Thus, manager selection and monitoring is essential; and
• In implementing a private investment strategy, customization to plan objectives and characteristics is fundamental to program success.

Click here to view the full article in PDF format.