Expectations of low returns across traditional asset classes aresending institutional investors to search out returns anddiversification via investments in private assets.

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That’s according to a report from Cerulli Associates, which says thatinstitutions are looking at a broader range of investment structures, seeking better returnsthan those currently expected—which are below target returns.

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“The persistent low-return environment has led severalinstitutions to cut their assumed rates of return,” MicheleGiuditta, associate director at Cerulli, says in the report. “Thetwo largest U.S. public pensions, the California Public Employees’ Retirement Systemand the California State Teachers’ Retirement System board, plan togradually lower their target rates to 7 percent from 7.5 percentduring the next couple of years.”

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The report adds that the two California public pensions areexpected to be leading the way for additional actions by others,citing the National Conference on Public Employee RetirementSystems’ 2016 survey of 159 public pensions and its indication that28 percent of respondents also plan to reduce their assumed ratesof return.

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“Future return expectations for a traditional 60/40 equity/bondportfolio are low to mid-single digits, below return targets ofmost institutional investors,” Giuditta adds. “Accordingly, manyare turning to more illiquid private investments—private equity,private debt, private real estate, infrastructure, and naturalresources—to meet their long-term return goals.”

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Institutional investors are using private closed-end funds tomeet multiple objectives in their portfolio for a range of reasons.The broad range of private fund strategies, the report says, can not onlyprovide strong returns, but also diversification, lower volatility,a hedge against inflation, and/or reliable income.

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A substantial majority of general partners surveyed by Cerulliidentify diversification (89 percent) and enhanced returns andasset growth (79 percent) as the primary objectives of theirprivate investment funds.

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Private investments had a record total of $4.5 trillion in totalworldwide assets under management as of December 31, 2016, thereport says, citing Prequin figures that also point out that totalis an approximate 7 percent increase from the end of 2015, whensuch assets totaled $4.2 trillion.

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It adds that private equity, chiefly buyout and venture capitalfunds, constitute the bulk of private investment assets, $2.49trillion as of year-end 2016.

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