Achieving Liquidity in Private Markets for Defined Contribution Pension Plans

July 18, 2018

In the US, defined benefit (DB) plans have long invested in private markets to earn higher risk-adjusted returns and diversify their portfolios. In fact, private markets continue to grow in DB plans, making up approximately 20% of global portfolios in aggregate. Yet even as pension managers continue to allocate significant amounts of capital to private markets, US defined contribution (DC) plans have remained on the sidelines.

The challenge facing American plan sponsors lies in the fact that the features which enable private markets to generate outsized risk-adjusted returns are also incompatible with how DC plans operate: for institutions that function in a daily pricing environment and support a high volume of participant cash flow activities, it can be difficult to incorporate assets that only provide quarterly valuations and episodic liquidity. However, as private markets have evolved, StepStone believes new investment structures have the potential to overcome these concerns.

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