Illiquid strategies include real estate, infrastructure and private equity.
Real estate provides predictable income helping to fund the Plan’s pension obligations. It generates attractive risk-adjusted returns and helps lower funded status volatility. Real estate is also an important diversifier and a hedge against inflation over the long term.
A strengthening global economy, buoyant capital markets and the rising demand for real estate investments have led to elevated levels of transactions and continued high pricing for properties. Supporting these dynamics, supply and demand fundamentals are balanced in most markets and the premium for investing in real estate over government bonds remains attractive.
2017 was a year of active investment activity, with the Real Estate Group committing to six new investments totaling $308 million. All new investments were sourced through existing partners, reflecting our ability to access compelling investment opportunities through the strength and depth of OPTrust’s network of trusted partner relationships.
However, new commitments were more than fully offset by over $500 million of selective realizations in 2017. The real estate portfolio generated a net return of 14.7%.
Infrastructure investments add diversification and act as a partial inflation hedge for the total fund. They also provide potential for long-term growth.
In an environment of low interest rates, readily available access to attractive debt financing and steadily rising institutional allocations to infrastructure, valuations for assets remain elevated. This environment created good selling opportunities in the portfolio. In 2017, we committed to three new investments totaling $285 million. The infrastructure portfolio generated a net return of 11.0% in 2017.
Private equity is expected to generate higher returns than public equity while providing a smoother volatility profile.
The overall private equity market remained competitive during 2017. While deal flow declined somewhat from previous highs, capital remains abundant and financing readily available. High valuations continue to present challenges in finding assets with attractive risk-adjusted returns, which highlights the importance of remaining disciplined in capital deployment.
In 2017, we committed to four new investments totaling $214 million and funded growth initiatives in four of our portfolio companies with follow-on investments. We also capitalized on the buoyant market conditions by selling minority ownership stakes in portfolio companies, but retained some exposure for further upside potential. Where appropriate, we also generated liquidity through dividends and other distributions via debt refinancing. The private equity portfolio generated a net return of 21.6% for the year.
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OPTrust's investments in private equity and infrastructure are managed by the Private Markets Group (PMG), an internal team established in 2005Find out more >