Private Investments: Filling a Pension’s Return Void

In this research note, we explore how pension funds may benefit from private investments, discuss key considerations, and develop a framework for successful implementation.

• Private investments offer pension funds the opportunity to significantly increase returns when implemented well, capture some diversification benefits, access a more complete opportunity set, and improve funding levels. For example, if private investments can beat public equities by 300 bps per year (as commonly targeted), then shifting 15% of assets from public equities to private investments would boost a pension fund’s total portfolio return by 45 bps per year.
• Particularly for higher-returning private investment strategies, the dispersion between manager returns is significant, underscoring the importance of selection.
• Illiquidity, complexity, transparency, and fees are important but surmountable considerations.
• Extracting value from private investments requires skill in all stages of the investment process and an experienced and well-resourced team of private investment professionals.

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