Liquidity solutions for real assets

A combination of public and private vehicles can help plans manage liquidity while capitalizing on real assets’ benefits.

Public and Taft-Hartley pension plans have steadily expanded their exposure to private market assets in recent years. In 2001, just 14% of public pensions’ risk assets were allocated to alternative assets.¹  By 2024, that figure had risen to nearly 35%.²

One area of private markets is receiving particular attention: real assets such as real estate, infrastructure, and natural resources. Used within a broader portfolio, positions in real assets can serve as a source of diversification, potential return enhancement, and risk reduction; they also can provide a meaningful source of income.

However, holding real assets in private vehicles alone may restrict plans’ overall liquidity, potentially increasing risks and limiting flexibility. Approaching real assets through a combination of public and private vehicles may help plans capitalize on real assets’ potential benefits while maintaining the liquidity they need to manage risks and capture emerging opportunities.

A complementary approach

Real assets’ ability to diversify away from the equity and fixed income markets is key to their appeal, and it can be especially valuable during times of heightened geopolitical and market risks. Certain real assets, notably infrastructure, also can provide attractive levels of income—a compelling prospect at a time when fixed income yields are declining amid Federal Reserve rate cuts and the S&P 500’s dividend yield of 1.17% sits near a historic low.³

In addition, most types of real assets can provide an important hedge against inflation. After a sharp post-COVID spike, inflation has ticked down meaningfully in recent years. A range of potential developments could reverse that trend. For example, the Federal Reserve may reduce interest rates too quickly, or the global race for the critical materials and minerals needed to support the growth of AI may lead to supply shocks. Moreover, an increasingly uncertain global trade environment has accelerated the push toward deglobalization, which could drive costs and wages higher. The potential for more frequent spikes in inflation poses challenges for public and Taft-Hartley pension plans, especially open and active plans in which rising inflation may affect liabilities.

The private market for real assets is diverse, mature, and growing. Private capital for real assets was estimated at $4.1 trillion in 2024; it is forecast to rise to $5.2 trillion by 2029.⁴ However, an overreliance on illiquid private assets can limit plans’ abilities to perform necessary functions, including paying participants’ benefits, meeting capital calls, investing opportunistically, and paying expenses.

One strategy to address that challenge is to use a combination of publicly listed and private real assets. A public/private approach can enable plans to take advantage of the benefits of private market exposure while improving their liquidity position and maintaining their real assets target exposures. Public assets can provide important sources of daily liquidity that can be used to manage capital calls or distributions from private managers (see Figure 1), and they can serve as cost-effective tools plans can use to manage exposures and minimize portfolio disruptions.

Incorporating public real asset exposures

Plans can build complementary public real assets allocations transparently and cost-effectively using indexed strategies tailored to a plan’s specific needs. As an example, State Street Investment Management’s Real Asset Strategy combines exposure to a broad array of liquid real asset securities. This diversified, multi-asset strategy can be used as a core real asset holding or serve as a liquidity vehicle in conjunction with private real asset exposures.

Off-the-shelf products may be the right fit for plans looking for a low-cost, easy-to-implement solution. Other plans may seek out a custom solution that better aligns with their investment needs or policy benchmark. For example, they might customize the weights of publicly listed real assets to more closely align with the plan’s private investments. Alternatively, a plan with a private allocation that is heavily exposed in one real asset segment may choose to reduce or eliminate similar exposures in its public allocation.

The mix of public and private real assets also can depend on the plan’s objectives and whether it prioritizes generating growth, driving income, or managing volatility. For instance, a plan with a long time horizon may seek to increase its risk exposure by reducing or removing exposure to TIPS, whereas a plan with a shorter horizon might aim to reduce volatility by decreasing or eliminating exposure to commodities.

This type of custom approach can take many forms. In one case, State Street Investment Management worked with a pension plan to help it manage its real assets allocation. The plan’s investment policy statement outlined dedicated real assets exposure with allocations to real estate, infrastructure, natural resources, and commodities. It had some existing private market real estate investments and wanted to include other real assets in its policy mix.

State Street Investment Management worked with the plan to create a custom portfolio. The plan used indexed assets to gain immediate, liquid exposure to public real assets in anticipation of building private market allocations over the next three years. The real assets allocation was rebalanced regularly to maintain appropriate exposures, providing liquidity for cash flows that funded private market investments and other portfolio needs. When the plan sponsor sought to change the real asset mix, its liquid exposures enabled it to adjust the composition quickly, efficiently, and cost-effectively.

For public and Taft-Hartley plans, private market real assets can serve as an important source of diversification, inflation hedging, and income. To capitalize, plans need strategies that can help them manage private assets’ relative illiquidity. Thoughtful liquidity management strategies—including combining public and private real assets exposures—can help ensure that plans not only can handle unexpected risks, but also can take advantage of investment opportunities that arise in today’s dynamic and volatile market environment.