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 investors who lock up cash in long-term investments, saying the so-called illiquidity premium no longer existed for most assets.

Richard Tomlinson, chief investment officer of the LPP, which provides retirement benefits to about 600,000 town hall workers, said it used to be the case that illiquid assets, such as infrastructure or real estate, would typically deliver “excess returns” but the situation had changed.

“Ten or 15 years ago, there was a premium paid in many areas for holding illiquids,” Tomlinson said 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 said.

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

Yet, Tomlinson said such products were still being heavily 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 comments came as large defined contribution funds in the UK are being encouraged to direct more of their cash to illiquid investments, such as infrastructure and commercial property.

A UK government consultation document in 2019 said that by investing almost wholly in highly liquid investments, such as listed equity and debt, pension funds could be missing out on the illiquidity premium.

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

About 28 per cent is held in infrastructure and real estate, with more capital set 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 said.

“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 said.

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