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July 18, 2023

Benefits Canada: Pension funds seeking inflation protection through illiquid assets

Pension funds and other institutional investors are planning to increase their allocations to illiquid assets over the next two year to help protect them against rising inflation and interest rates, according to a study by Aeon Investments.

The research, which surveyed institutional investors from around the globe, found that 26 per cent were planning to ‘dramatically’ increase their allocations to illiquid assets.

Furthermore, more than half (59 per cent) said they would increase their allocations to illiquids ‘slightly’.

However, 12 per cent of respondents stated they were planning to keep allocations to iliquids the same, while 3 per cent were expecting to decrease their level of investment in illiquid assets.

According to respondents, the primary driver for investing in illiquid assets was the need to protect from macro uncertainty.

More than half (52 per cent) said this was the primary motivation for choosing private debt investments, which Aeon noted offered the potential for a natural hedge against inflation.

Over a quarter (29 per cent) stated that the most important feature of private debt assets was that they offer diversification benefits.

Meanwhile, within illiquid assets, 80 per cent favoured increasing allocations to residential real estate, with 43 per cent expecting to make ‘dramatic’ increases.

Commercial real estate was seen as a growing area of interest for 81 per cent of respondents, with 28 per cent stating they would increase allocations dramatically.

Three quarters (75 per cent) expected to increase allocations to specialist areas of corporate finance, while 70 per cent said they would increase allocations to consumer credits.

“The private debt markets continue to innovate and expand offering investors more bespoke solutions that can help them meet their objectives, especially when inflation is high,” commented Aeon Investments head of capital markets strategies, Evgeny van der Geest.

“It makes sense that investors want their private debt managers to align their interests by co-investing in the underlying vehicles with the same risks and fee structures.”



Pension funds seeking inflation protection through illiquid assets

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