Skip to main content
PGIM LogoPGIM Logo
    • Megatrends
    • Annual Best Ideas
    • Quarterly Market Outlooks
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • ESG Investing
    • Investing in Alternatives
    • Reaching for Yield
    • Investing in Emerging Markets
    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
    • Advisory Solutions
    • Global Locations
    • Contact Us
    • Overview
    • Leadership
    • History
    • Diversity, Equity & Inclusion
    • Global Locations
    • Jennison Associates
    • PGIM Fixed Income
    • PGIM Private Capital
    • PGIM Real Estate
    • PGIM Quantitative Solutions
    • PGIM Investments
    • Montana Capital Partners
    • PGIM DC Solutions
    • Contact Us
    • Subscribe
    • Request for Information
    • Careers at PGIM
    • Job Opportunities
    • All News
    • Press Releases
    • In the News
    • Facts & Figures
    • Media Contacts
Unlocking the Potential of Private Assets
Illiquid Private Assets

Harnessing the Potential of Private Assets: A Framework For Institutional Portfolio ConstructionHarnessingthePotentialofPrivateAssets:AFrameworkForInstitutionalPortfolioConstruction

By Junying Shen & Dr. Michelle (Yu) Teng — Jun 3, 2021

7 mins read

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
Download White Paper

Share

Institutional portfolios such as corporate pension plans are increasing allocations to illiquid private assets seeking better returns and diversification. However, as allocations increase, a portfolio’s liquidity structure changes, sometimes abruptly. How can a CIO increase their confidence with private asset allocations and unlock their potential?

For asset allocators, liquidity risk is one of the most critical, but least quantified, risk dimensions in portfolio construction. For example, corporate defined benefit (DB) plans have many unexpected liquidity demands, besides scheduled benefit payments, which should be accounted for when evaluating liquidity risk. A plan should be able to rebalance when market movements cause allocations to exceed risk limits. A plan also needs liquidity to meet unexpected capital calls and to be prepared for exogenous cash flow events driven by corporate actions (e.g., pension risk transfers, corporate contributions, and merger and acquisition activities). Many plans also have asset allocation glide paths, conditional on the plan’s funding ratio, that may present additional liquidity strains as it could be difficult to sell private assets to satisfy new allocation targets. 

Using a corporate defined benefit pension plan as our example, we present and illustrate a practical cash flow-driven asset allocation framework (OASIS™ – Optimal Asset Allocation with Illiquid Assets) that consistently models private asset cash flows together with expected public asset returns and risk that drive the portfolio construction process. OASIS can help CIOs analyze how their top-down asset allocation and their bottom-up private investing activity interact to affect their portfolio’s ability to respond to liquidity demands in a multi-asset, multi-period setting. 

We also illustrate how a CIO can use OASIS to determine their portfolio’s expected tradeoff between performance and various risks such as funding ratio variability, glide path changes, corporate actions and sustained liquidity drawdowns.

For example, given a DB plan’s baseline glide path (GP) asset allocation (with increasing LDI as the funding ratio improves), liability and corporate contribution schedules, and public assets capital market assumptions, OASIS shows the CIO how the funding ratio evolves over time (Figure 2). In addition, OASIS can tell the CIO when to expect the plan to be fully funded – and how the portfolio migrates across the GP states over the investment horizon (Figure 3).

We consider three “what-if” scenarios: 1) an alternative corporate plan glide path that more gradually increases LDI; 2) higher contributions from the corporate sponsor; and 3) superior private equity CIO fund-selection skill. Figure 4 summarizes the tradeoffs between raising the funding ratio, increasing portfolio performance, minimizing portfolio liquidity and drawdown risk. Quantifying these tradeoffs can help CIOs make investment decisions on asset allocation, private asset commitment strategy and glide path design.

Download White Paper

Portfolio Insights

Harnessing the Potential of Private Assets

CIOs need a framework combining three components in order to form a complete understanding of the trade-off between their portfolio’s liquidity risk and performance.

Download
Learn More
Institutional Advisory & Solutions

The IAS team conducts bespoke, quantitative client research that focuses on asset allocation and portfolio analysis.

Learn More

  • By Junying ShenVice President, Institutional Advisory & Solutions, PGIM
  • By Dr. Michelle (Yu) TengVice President, Institutional Advisory & Solutions, PGIM

You may also like

Super Funds & Master Trusts in a World of Member Switching, Early Release Schemes & Climate Calamities
Illiquid Private Assets

Super Funds & Master Trusts in a World of Member Switching, Early Release Schemes & Climate Calamities

By Dr. Michelle (Yu) Teng — Mar 23, 2022

Quantifying the “hidden” performance cost of early access to retirement funds helps CIOs and regulators make more informed decisions.

The Rebalancing Conundrum: Private Equity Valuations and Market Dislocations
Illiquid Private Assets

The Rebalancing Conundrum: Private Equity Valuations and Market Dislocations

By Junying Shen — Dec 27, 2021

We show how portfolio rebalancing hinges on the PE valuation approach. CIOs need to understand this connection and how it affects their portfolio’s liquidity.

A Rising Private Asset Class: Core+ Real Estate Debt
Illiquid Private Assets

A Rising Private Asset Class: Core+ Real Estate Debt

By Dr. Michelle (Yu) Teng — Jul 8, 2021

CIOs managing a multi-asset portfolio may wonder how the specific cash flow dynamics of private core+ RE debt affect the portfolio’s liquidity and performance.

  • Insights

    • Megatrends
    • Annual Best Ideas
    • Quarterly Market Outlooks
    • Market Events
    • Thought Leadership
    • Events & Webinars
  • Investment Themes

    • ESG Investing
    • Investing in Alternatives
    • Reaching for Yield
    • Investing in Emerging Markets
  • Clients

    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
    • Advisory Solutions
  • About

    • Overview
    • Leadership
    • History
    • Diversity, Equity & Inclusion
    • Global Locations
    • Contact Us
    • Subscribe
    • Request for Information
  • Careers

    • Careers at PGIM
    • Job Opportunities
  • Newsroom

    • All News
    • Press Releases
    • In The News
    • Facts & Figures
    • Media Contacts
PGIM Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • UK Regulatory Disclosures
  • Netherlands Regulatory Disclosures
  • Cookie Preference Center

For Professional Investors only. All investments involve risk, including the possible loss of capital.

It is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM, Inc., is the principal asset management business of PFI and is a registered investment advisor with the US Securities and Exchange Commission(SEC). Registration with the SEC does not imply a certain level of skill or training.  PGIM is a trading name of PGIM, Inc and its global subsidiaries.    

In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418). In the European Economic Area (“EEA”), information is issued by PGIM Netherlands B.V. with registered office: Gustav Mahlerlaan 1212, 1081 LA  Amsterdam, The Netherlands. PGIM Netherlands B.V. is, authorised by the Autoriteit Financiële Markten (“AFM”) in the Netherlands (Registration number 15003620) and operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. These materials are issued by PGIM Limited and/or PGIM Netherlands B.V. to persons who are professional clients as defined  under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II).  

In Japan, investment management services are made available by PGIM Japan, Co. Ltd., ("PGIM Japan"), a registered Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 (paragraph (a) to (i) of the Securities and Futures Ordinance (Cap.571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a Singapore investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.    

Prudential Financial, Inc. (PFI) of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. PGIM, the PGIM logo and Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.  The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.    

©2021 PFI and its related entities.