CIO of £19bn pension pot casts doubt over returns from illiquid assets

The £19bn Local Pensions Partnership has hit out at asset managers that promote outsized returns to traders who lock up money in long-term investments, saying the so-called illiquidity premium not existed for many belongings.

Richard Tomlinson, chief funding officer of the LPP, which gives retirement advantages to about 600,000 city corridor staff, stated it was once the case that illiquid belongings, equivalent to infrastructure or actual property, would sometimes ship “excess returns” however the state of affairs had modified.

“Ten or 15 years ago, there was a premium paid in many areas for holding illiquids,” Tomlinson stated in an interview with the Financial Times.

“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’. 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,” he stated.

Yet, Tomlinson stated such merchandise had been nonetheless being closely promoted.

“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.”

Tomlinson’s feedback got here as giant outlined contribution funds within the UK are being inspired to direct extra of their money to illiquid investments, equivalent to infrastructure and business property.

A UK authorities session doc in 2019 stated that by investing virtually wholly in extremely liquid investments, equivalent to listed fairness and debt, pension funds might be lacking out on the illiquidity premium.

In spite of his views, LPP has a heavy weighting in illiquid belongings.

About 28 per cent is held in infrastructure and actual property, with extra capital put aside for “selective” future infrastructure purchases.

“Don’t get me wrong, I see significant value and benefits in owning private assets but not just myopically chasing an illiquidity premium,” he stated.

“Some of these assets may well have no illiquidity premia embedded in them and the expected returns will be driven by other factors; that is fine,” he stated.

The Investment Association, which represents asset managers, declined to remark.