On the go: The chief investment officer of the £19bn Local Pensions Partnership has criticised asset managers promising unrealistic returns from illiquid assets, arguing that they no longer provide the same premium they once did.
In an interview with the Financial Times, Richard Tomlinson said that illiquids were still being touted by asset managers as offering the kind of returns they did 10 or 15 years ago, which does not reflect current market conditions.
“It used to be an easy sale of say private credit — ‘hey, if you can lock your money up we can get you extra return’,” he told the FT.
“For return-hungry investors this made sense, assuming they could wear the illiquidity. However, as more capital has flowed to these opportunities the returns offered have fallen. Suddenly there isn’t a premium to be had.”
Pension schemes in general, and defined contribution schemes in particular, are being urged to find ways of investing in illiquid assets, not least as part of the government’s campaign to ‘build back better’.
Pensions Expert has reported previously on Bank of England governor Andrew Bailey’s call for regulatory easement to allow DC pension pots to be used to fund the post-Covid economic recovery.
LPP itself has a significant investment in illiquid assets, with about 28 per cent held in infrastructure and real estate and more set aside for “selective” future purchases.
Tomlinson said he did not doubt the value of holding some illiquid assets, but discouraged investors from “myopically chasing an illiquidity premium”.
“If you buy illiquid assets when they are ‘expensive’ the illiquidity premia could be negative, or even if it is positive it may not be sufficient to compensate for losses on other risk factors,” he warned.
