Are Sovereign Funds Correctly Assessing Risk in Their Illiquid Portfolio

illiquidity premium

Asset-heavy sovereign wealth funds and public pensions are widely recognized for holding a considerable amount of illiquid assets, particularly in private equity and real estate. For example, the California Public Employees’ Retirement System in October 2013, held 20% in private equity and real estate. The California pension goliath is attempting to unwind a portion of these assets and reduce the number of manager relationships. Across the Pacific, Singapore’s GIC has a band average of 25% targeted to private equity and real estate in their policy portfolio. The GIC is also periodically involved in taking hefty stakes in companies via private placement. Higher typical returns coupled with these public investors’ long-term investment horizons, on the surface, seem to make sense. However, there are hidden costs of holding a large illiquid portfolio.

A deadly outcome of a liquidity crunch is a fire sale – a board’s worst nightmare.

Bailout Fund – Ireland’s Experiment

Future unexpected liquidations can be a monstrous cost if the illiquidity premium is not properly priced through various stress tests. A distinct amount of sovereign funds explicitly do not have the types of liabilities pensions’ possess. In times of economic crisis, national governments may call upon sovereign wealth for monetary assistance. For example, during the global financial crisis of 2007, the Irish National Pensions Reserve Fund (NPRF) was used as a policy tool to bailout two noteworthy Irish banks, Allied Irish Banks and the Bank of Ireland. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Contact the writer or creator of this article or page.
Questions or comments: support(at)swfinstitute(dot)org
Follow on Twitter at @swfinstitute and @sovereignfunds
Learn, Attend and Network: Institutional Investor Events and Summits
Go Back: HOME: Sovereign Wealth Fund Institute

institutional investor investment mandates