Behind the scenes in a major LP's investment committee. Follow along below to see how conceptual observations can quickly become reality for the real estate capital markets.
This $90B fund has been reviewing its asset allocation strategy:
"Last May, Staff reviewed the Status Quo portfolio allocation along with two alternatives (Option 1 and Option 2); ultimately Status Quo was reaffirmed, however, Trustees indicated desire to continue the review in the Fall"
The Fund's trustees insisted on an alternative plan, focused on reducing allocation to private assets.
Here's the staff's recommendation (taken directly from its IC memo):
– Move incrementally given the “steering the battleship” nature of private markets
– Reduce allocation to each of Private Equity, Real Estate and Private Income by 1% over each of the next three years
– Fixed Income allocation also reduced to 15% from 20%
– Most of the reductions offset by increases to Public Equities with a minor increase to Absolute Return
– Taken together moves do not represent a de-risking of the portfolio or a lower expected return, but they do result in material increase to portfolio liquidity and increase to future optionality around private markets
– Review and optimize sub-portfolio allocations within Fixed Income to achieve higher Sharpe Ratio and higher expected return
---- Takeaway ----
Retirees aren't the only investors who might have previously undervalued liquidity. 1% reduction in real estate capital may not sound like a ton at a high level. But that's $800M of equity. $1.6B ish in total real estate capital. From one investor. Totally off the radar.
How many others are contemplating similar moves?
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