By Gary Lin, Managing Director, Head of Global Portfolio Strategy and Solutions, Blue Owl.
We often think of large institutional investors like pension funds, university endowments and sovereign wealth funds as behemoth organizations with highly complex investment decision-making processes. In contrast, many private wealth clients invest to solve very human problems, like preparing for retirement, for college savings, or for a more comfortable lifestyle in the future. Different as they may seem, are there lessons that these large institutions hold for your clients?
While it might be true that many large pools of institutional capital are intricate, sophisticated organizations, at the same time, these institutions exist to pursue many of the very same goals as your clients. To examine this further, let's take three models of investors: the saver, the spender, and the grower. You've probably found that many of your clients fit these descriptions and their portfolios are built accordingly. What you may not realize is that institutional investors fit these descriptions too.
The Saver. Carefully saving to meet a tight budget.
Maybe your saver is a family with young kids who have a lot of expenses, but know they need to put money away for education and for retirement. Such families may skew towards conservative investments as they are afraid to put capital at significant risk and meeting their investment goals means keeping a tight budget. A lot of university endowments look like the saver. The average university endowment had a three-year return of around 7.5% in 2022, but they paid out almost 5% in contributions to their university's operating budget.1 In a world where costs of education are skyrocketing, university endowments can feel pressure to help meet current expenditures while at the same time growing their asset base for the future.
The Spender. Spending more than they take in.
Maybe you have clients who are getting older and have postponed making difficult decisions to prepare for retirement. They can be playing catch up. State employee retirement systems may be playing catch up too. They can face enormous payments to retiring employees. In some cases, they may be paying out more to retirees than they take in through retirement contributions of current workers, and the balances they've accumulated over the last twenty or thirty years can be insufficient to meet their obligations. In 2023, state pension plans had unfunded liabilities of nearly $1.5 trillion.2 Quite simply, they aren't fully prepared for the retirement of the workers they serve.
The Grower. Growing wealth for the future.
Maybe some of your clients are ahead of the curve. They've started to put money away early, and they're motivated to see their money grow. They're willing to take risk because they have flexibility and are relatively far away from needing the money they’re accumulating. Many sovereign wealth funds may look like these clients. The ten largest sovereign wealth funds manage nearly $9 trillion in assets.3 What could they possibly have in common with ordinary households? Well, like the grower it is accumulating capital without the need to earmark near-term returns for specific purposes. Unlike the university endowment, it doesn't need to meet current expenses with the income generated by its investments. Unlike the spender, it doesn't need to play catch up to make up for years of procrastination or undisciplined savings. While they control eye-watering sums of assets, in terms of investment style and motivation, sovereign wealth funds may not be that different than the growers that you see among your clients.
What do these large institutional investors have in common?
The thing that all these types of institutional investors—growers, spenders, savers—have in common is that they generally rely on private market investments like private equity, real estate, and private credit to help enhance their returns, boost their diversification alternatives, and generally give them better risk-adjusted performance than they may get with more traditional stock/bond portfolios. Some do it to catch up, some do it to get ahead, some do it to ease the pressure of meeting current obligations while saving for tomorrow.
The Saver: Preparing for the future with private markets
Let’s take college endowments, the savers. A 2023 study by the National Association of College and University Business Officers reported summary asset allocations for university endowments by size of the endowment:
The column labeled “Alternative Strategies” tells an important story. Two things really jump out. First, college endowments of all sizes devote an important portion of their portfolio to alternatives. Even the smallest endowments have north of 13% of their allocation to alternative strategies. Such an allocation means that a $50 million university endowment – which is tiny by college endowment standards – is putting around $6.5 million in these investments.
The second thing that jumps out is just how dominant alternative strategies appear to be for the biggest funds. The larger the endowment, the lower the exposure to public markets. The biggest university endowments generally allocate more than half of their investment portfolio to alternative strategies. The reason this statistic is noteworthy is that the biggest endowments are the ones that have the biggest responsibility to fund the operating budgets of their schools. Schools with tiny endowments rely predominantly on tuition for operations, but public institutions with large endowments rely quite heavily on those endowments to meet the day-to-day operating costs. These schools are the ones that are most like your savers.
A key takeaway here is that savers of all sizes and levels of sophistication may have room in their portfolio for private market investments. Updating client portfolios to include thoughtful exposure to alternative assets can potentially give savers an edge as they prepare for tomorrow while meeting the needs of today.
The Spenders: Using private markets to help close the gap
Many state pension funds face a chronic problem: they are underfunded. That’s bad news for many state employees across the country because it puts their retirement security at risk. But the good news is that some pensions have closed the gap in recent years through a combination of prudent investment and careful management. Their experience can offer lessons for the spenders out there.
A 2024 report by the non-profit Equable Institute illustrates the role that private market investments have played in the catch-up process that many pension funds have undertaken. They report that “There is no way that pension funds can meet their investment targets using simple stock and bond passive portfolios,” and then point out that pension funds either have to face the tough political choice of “increasing contributions into pension funds beyond their currently historically high levels”, or they must change their investment portfolios. Investments in private markets by state pensions have grown from around $100 billion in 2001 to over $1.7 trillion in 2023 and now comprise 34% of pension fund investments, the largest share in history.5
The Growers: Seeking higher absolute returns with private markets
Sovereign wealth funds are perhaps the most bullish investors when it comes to allocating capital to private markets.
Of course, this philosophy is partly a function of their size. Sovereign funds manage large pools of capital, so they can likely afford to have a large staff of internal investment managers and analysts. These resources allow them to take an even more aggressive approach to alternative strategies than many other investors. The impact can be seen in the fact that the average large sovereign fund has 10% of its portfolio invested in direct strategic investments – private market investments that it originates on its own.
Consider a page from the institutional investor playbook
The modern investment landscape is becoming an increasingly complex place to seek consistent returns with portfolios limited to traditional public equity and fixed income. Large institutional investors address this complexity by including investments in the private markets in their portfolios as they pursue potentially higher returns and increased diversification.
Thanks to advancements in technology and fund structures, private markets are more accessible than ever for private wealth clients. For advisors interested in introducing exposure to private market assets into the portfolios of clients, evergreen structures have emerged as a smoother point of entry.
Compared to closed-end vehicles which have traditionally served as the primary access point for private assets, the evergreen structure can offer better flexibility and liquidity, with reduced investment minimums and frequent opportunities for redemption. These innovations have lowered the barriers to entry for private wealth clients, enabling more investors to participate in private markets.
Increasing wealth allocations suggest that private markets aren’t the luxury they once were.7 Instead, they’re becoming a staple in well-balanced portfolios, with many investors enjoying the same benefits that have made alternative investments a fixture in the portfolios of institutional investors for decades.
For clients looking to start their private markets journey, evergreen vehicles may represent
an accessible way to offer exposure to new opportunities and help them pursue investment goals, whether they are savers, spenders or growers.
About the Author
Gary Lin is a Managing Director at Blue Owl and member of the Private Wealth Team. Gary serves as the Head of Global Portfolio Strategy and Solutions. In this role, he is responsible for the global growth and expansion of product and portfolio strategy across the full platform with Financial Advisors and High Net Worth Investors.
Before joining Blue Owl, Gary spent 10 years at Blackstone where he held numerous leadership roles in multiple regions and parts of the business. Most recently, Gary was a senior member of the real estate group based in New York covering opportunistic, core plus, and debt strategies with institutional relationships across the Americas Region. Additionally, he worked globally with the private wealth division to expand distribution of the flagship vehicle, Blackstone Real Estate Income Trust. Prior to his role in real estate, Gary served as the Head of Asia for Blackstone’s private wealth division based in Singapore where he built the business and led strategic initiatives across the region. Prior to that, Gary was the Head of Southeast Asia alternatives business at JP Morgan and worked at Morgan Stanley in New York where he built out data, analytics, and sales reporting functions for the Alternatives group. Gary began his career in private wealth and alternatives at Merrill Lynch where he was a financial professional within the wealth management division.
Gary holds a BA in Computer Science from Cornell University and an MBA from The Fuqua School of Business at Duke University
Endnotes
- Source: 2023 NACUBO-TIAA Study of Endowments
- Source: Equable Institute – “Unfunded Liabilities for State Pension Plans in 2023”, Published August 24, 2023.
- Source: Sovereign Wealth Fund Institute – Fund Rankings: Sovereign Wealth Fund
- Source: 2023 NACUBO-TIAA Study of Endowments
- Source: Equable Institute – State of Pensions 2024 Annual Report
- Source: Statista Survey of global sovereign wealth funds, July 2023
- Sources: Bloomberg, Cliffwater. Direct lending is represented by the Cliffwater Direct Lending Index. Syndicated Loans represented by the S&P/LSTA Leveraged Loan Index. High Yield bonds represented by the Bloomberg Barclays High Yield Index.
- Source: Preqin 2024 Global Report: Private Debt
Important Information
Unless otherwise noted the Report Date referenced herein is as of February 2024.