Expectations of low returns across traditional asset classes are sending institutional investors to search out returns and diversification via investments in private assets.

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

“The persistent low-return environment has led several institutions to cut their assumed rates of return,” Michele Giuditta, associate director at Cerulli, says in the report. “The two largest U.S. public pensions, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System board, plan to gradually lower their target rates to 7 percent from 7.5 percent during the next couple of years.”

The report adds that the two California public pensions are expected to be leading the way for additional actions by others, citing the National Conference on Public Employee Retirement Systems’ 2016 survey of 159 public pensions and its indication that 28 percent of respondents also plan to reduce their assumed rates of return.

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

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

A substantial majority of general partners surveyed by Cerulli identify diversification (89 percent) and enhanced returns and asset growth (79 percent) as the primary objectives of their private investment funds.

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

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

Instant Insights /

Low-return expectations sending institutional investors to private assets

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