When a group of defined benefit plan sponsors was asked about a projected return, the median response to a recent  PLAN SPONSOR/ Deutsche Asset Management survey was 8.0% for real estate next year, and three years from now.   On the other hand, the median return projected for private equity next year was 10.0%, and an even more optimistic 11.4% three years from now – although most respondents (68%) said the recent performance of private equity was not a factor in determining future investment levels.  

Hedge funds seemed to hold even greater growth potential.   While the median survey projection for hedge fund returns next year was 8.0%, that figure rose to 10.0% three years from now, according to respondents.  

Hedge “Edge”

Diversification and returns were most frequently cited as motivations in pursuing private equity investments, although 38.7% said that the illiquid nature of the asset class was “somewhat of a concern.”   However, more than 41% said it was not much of a concern, and nearly 11% said it was not a concern at all.

Real estate was viewed as a separate asset class by more than half (57.8%) of survey respondents, and as part of an alternative investment allocation by about a third.   Most real estate investments were in private equity real estate (71%) and public equity real estate securities, cited by 43%.   As for property types, office (cited by 68.9%), retail (63%), and industrial/R&D (62%) dominated respondent lists.   Hotels were a distant fourth place, cited by 40%.

Hold Outs?

Among those plan sponsors that have not currently allocated funds to alternatives, 36.5% say they would consider doing so in the future, although more than half (58.2%) say there are no plans to consider the option.   As to why not, “too risky” was the most commonly cited factor, noted by 43.5% of that group.   Just 14.1% said there was not enough transparency, and a mere 10% cited fees, both typically bandied about as alternative concerns.  

Nearly a third said the reason was no more substantive than “a lack of information.”   Still, more than a quarter (28.2%) said their board doesn’t approve of the class, and roughly 1 in 5 said their plan documents do not currently permit alternative investments.

“Real” Deals

Where current allocations to the class do exist, real estate was the most commonly cited holding, and was already in place at nearly three-fourths of survey respondents.   Private equity was a surprisingly strong second place, showing up in more than two-thirds of respondent allocations, while hedge funds were a distant third, held in just a quarter of the responding portfolios.

The survey, conducted in late February 2003, included the perspectives of nearly 300 defined benefit plan sponsors on their attitudes and actions regarding the alternative investment class, defined as real estate, private equity, or hedge funds.