Pensions Jack Up Exposure to Alternative Investments

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Pension funds turn to alternative investments to offset the chronic low rates regime.

According to the Federal Reserve, public pension liabilities totaled $9.1 trillion at the end of the second quarter, but are backed by assets worth only $4.2 trillion. Interest rates have been declining since the financial crisis and the resultant falling investment returns have put pension funds under pressure. For a pension fund to be solvent, the contributions for current workers must appreciate at a rate to ensure that the fund’s promised benefits can be paid when due.

Pensions and insurers – in the same low interest rate boat

Because of low rates, these future liabilities remain unfunded. Therefore, it’s no surprise that pension funds have been increasing allocations to alternative investments that promise higher returns.

Funding of long-term liabilities are also a feature of insurers. CIOs at insurance companies are similarly in a bind due to low rates. A Natixis survey of 200 insurance CIOs found that three-fourths ranked low-interest rates as a key portfolio worry. The same number also said it was essential to include alternative investments in their portfolios.

Apart from improved alpha, other perceived benefits include diversification, risk and volatility management, and substitute poor-returning fixed income assets.

Recent alternative investment allocations by pension funds

Arizona Public Safety Personnel Retirement System invested or committed total of $205 million as follows:

Venture Capital – $20 million to Upfront Growth III, a venture capital fund managed by Upfront Ventures; and committed $10 million to Greenspring Opportunities VI, a venture capital fund managed by Greenspring Associates

Real Estate – $40 million to real estate fund Frogmore Real Estate Partners IV

Credit – $80 million to Crestline Opportunity Fund IV Onshore, a credit fund managed by Crestline Investors; invested $55 million in SIH Special Opportunities Fund, a credit hedge fund managed by Sabal Investment Advisors

Illinois Municipal Retirement Fund committed up to $275 million to minority- and women-owned firms as follows:

Private Equity – Up to $75 million each to Clearlake Capital Partners VI, a private equity fund and Valor Equity Partners V, a growth-focused private equity fund, and up to $50 million to Vista Foundation Fund IV, a small-cap buyout fund managed by Vista Equity Partners

Real Estate – Up to $75 million to core real estate fund Oak Street Real Estate Capital Fund V

Louisiana State Employees’ Retirement System committed $100 million to a growth equity fund as follows:

Private Equity – Insight Venture Partners XI, a private equity fund.

[Related Story: The American Investment Council Lists PE as Top Asset for Pensions ]

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