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Aon Retirement and Investment Blog

Daily Valued Private Real Estate Funds for DC Plans

Investment vehicles using private real estate have, historically, been largely unavailable to U.S. defined contribution (“DC”) plan participants - but that is changing. The maturation of daily-priced private real estate funds along with a shift in DC plans towards the use of multi-asset portfolios such as custom target date and white labeled objective-based funds have introduced a new investment environment that is now well-positioned to incorporate private market investment vehicles into a U.S. DC investment plan.

In these multi-asset class portfolios, DC plan sponsors combine asset classes and investment managers to pre-diversify portfolios for participants. The multi-asset class structure supports enhanced diversification and greater liquidity management, making them more suitable for DC participants.Private real estate funds that address legacy vehicle concerns —namely liquidity, valuations, and pricing frequency—are now available for incorporation into U.S. DC Plans. With these products, DC Plan Sponsors can incorporate the return profile and diversification benefits of private core real estate into their multi-asset class investment portfolios, receiving the same potential sector benefits that DB Plan Sponsors have been enjoying for decades.

Why Private Real Estate? 
DC participants have had minimal exposure to private real estate historically due to a lack of viable investment options that meet DC market needs—namely concerns regarding private real estate’s potential illiquidity, historical valuation policies, and pricing frequency. As a result, most U.S. DC plans' real estate exposure today, if any, consists of a small allocation to publicly-traded Real Estate Investment Trusts (“REITs”). REITs represent one segment of the real estate asset class, and while they exhibit a long-term positive correlation with private core real estate, REITs have a different risk/return profile and are often utilized to play a different role in overall portfolio construction. Aon Hewitt believes that the primary inclusion objective for real estate within a DC plan should be on obtaining income and diversification, with some potential for inflation hedging over multi-year investment horizons. These goals are best met within the real estate asset class by utilizing private core real estate in a multi-asset class portfolio.

New and Improved Solutions
Private real estate investment funds available to U.S. DC Plans have evolved over the past three decades with improvements focused on addressing specific legacy concerns---namely liquidity, valuations, and pricing frequency. Today’s vehicles offer daily net asset values (NAVs), controlled trading parameters, and strong transparency. The funds’ strategies are focused on providing investors exposure to the sector’s Beta, namely private core real estate, through investment in stabilized, income producing real estate. Today’s daily-priced real estate funds are predominantly structured as fund-of-funds and limited to investment through multi-asset funds such as custom target date or objective-based funds only, though a few direct commingled fund options are still available.  These vehicles’ structures typically  maintain a ~75-85% allocation to private real estate (through investments in a manager’s existing institutional open-end private real estate fund or direct holdings) and a liquidity sleeve consisting of REITs and/cash of ~15-25%.

Given that most of the new private real estate vehicles require incorporation through a multi-asset fund, liquidity can largely be proactively managed utilizing levers both within the structure of the daily-priced real estate vehicle and by the DC plan sponsor through liquidity in other areas of the overall DC portfolio.

The Take-away
Aon Hewitt believes that U.S. DC Plan providers will be well-served in reevaluating the role, and vehicles, for gaining exposure to the characteristics of private real estate as new, innovative solutions utilizing custom products are now available that also meet the reporting and liquidity requirements of the U.S. DC marketplace. With the evolution of daily-priced private real estate funds and the DC market’s shift toward multi-asset platforms, especially custom target date funds, U.S. DC Plan providers now have the tools and access to provide U.S. DC plan participants exposure to the same attractive private real estate characteristics as DB plans have been enjoying for decades.
 
For more information on viable private real estate solutions please refer to our recently published white paper on Private Market Real Estate Investment Options for Defined Contribution Plans.
 
Jani Venter is a Senior Consultant in the Real Estate Group based out of the Chicago office.

 
The information contained above is intended for general information purposes only and should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.


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