Asset Allocation with Illiquid Private Assets
An asset allocation framework designed to help CIOs make more informed decisions concerning their strategic investments in illiquid private assets.
Are investors sacrificing too much portfolio performance in the name of liquidity? Investors may wish to increase allocation to private assets with their potentially greater returns and diversification benefits, but worry that these assets are too illiquid to generate sufficient cash when needed. How can investors measure the tradeoff between liquidity and performance to determine their optimal mix of private and public assets?
PGIM’s IAS team presents an asset allocation framework that investors can use as a tool to answer this question. Given an investor’s liquidity requirement, or the degree of confidence in meeting future obligations, what is the optimal mix of private and public assets, and what is the optimal allocation across assets within these portfolios? The framework incorporates realistic performance characteristics of private assets, including their unique cash flow profiles and lumpier transaction costs. The framework also allows investors to express views on expected private asset performance and their fund-selection skills.