The majority of UK master trust providers plan to invest between 21% to 30% of their illiquid assets towards UK-based opportunities, with a third committing over 40%, according to a study from Isio.
The growing allocation follows UK government initiatives, such as the 2023 and 2024 Mansion House reforms, and a broader focus on UK infrastructure and real estate as attractive long-term investment opportunities.
As of yet, specific allocations to UK venture capital are rare, with most providers considering this as part of a broader private equity move.
Isio’s research finds that target allocations vary between less than 5% at one end of the market, but increasing up to 30% at the other end. The variance accounts for two emerging approaches to illiquid assets within default strategies – either one single default with a modest allocation to illiquids, or a core and premium approach, where the former has a minimal illiquids allocation and the latter has a higher allocation.
Last year, NEST committed to investing £20bn in the UK market by the end of the decade, a commitment it has since cemented by taking a 10% in Australian infrastructure manager IFM Investors which it plans to invest £5bn in private markets with.
In January, The People’s Pension said it plans to invest a “significant” portion of the £31bn it manages in private markets later this year, with a target to grow its allocation to £4bn by 2030.
Among the most popular illiquid assets are real assets, particularly infrastructure and property, and private equity. According to Isio, these asset classes account for over two-thirds of each provider’s asset allocation.
Some providers are also taking a greater interest in natural capital, reflecting the fact that illiquid assets are where greater impact can be achieved from a sustainability perspective.
Isio found that master trusts will predominantly rely on external expertise to invest in illiquids, with the majority managing less than 20% of illiquid allocations internally.
Some plan to use in-house capabilities, but Isio said external managers will continue to play a significant role in providing specialist expertise.
It added that the choice between internal and external management is often influenced by cost considerations, scale, and governance requirements, with some providers using a mix of both within their illiquid portfolios.
George Fowler, partner at Isio, said: “Our research shows a clear shift towards greater investment in illiquid assets within DC master trusts, albeit with significant variation in both the size of allocation and whether one or two defaults are being offered.”
He said this will provide a “genuine choice” to the end investor.
“Within the illiquids allocation, we are also seeing a sizeable allocation to the UK, albeit this is more focused on UK infrastructure and property than venture capital to date,” Fowler continued.
He said that while allocating to illiquid assets has the potential to improve member outcomes, this will only happen with effective implementation and the appropriate balance between internal and external management.
Demand for illiquid assets declines, according to bfinance
Consultancy bfinance has found that private market searches dropped to 43% in 2024 from 58% in 2022. In contrast, real assets such as infrastructure and alternative real estate saw increased interest, making up 42% of private market searches.
According to bfinance, equity manager search activity remained strong, driven by portfolio redesigns, particularly in regional allocations. This also reflected portfolio redesign efforts and manager replacements, rather than an increase in equity allocations.
Global equity searches accounted for 58% of all equity mandates, while demand for emerging market equity strategies declined from 24% of equity mandates in 2023 to just 12% in 2024.
Despite the continued trend of increasing illiquid investment exposure among institutional investors, as shown by the 2024 bfinance Asset Owner Survey, the deployment pace remains below recent peaks, with caution evident in new exposures.
The report added that fixed income searches shifted towards emerging market debt in response to the potential for higher yields, although high-yield debt searches softened.
According to bfinance, the risk appetite remained resilient through Q4 2024, though signs of increased caution emerged as market conditions fluctuated.
The bfinance Risk Aversion Index indicated moderate caution, shaped by volatility in credit spreads, geopolitical instability, and fluctuating macro conditions.
The average equity allocation among multi-asset managers tracked by bfinance stood at 37% at year-end, slightly below Q3’s peak but still above the long-term average of 35%. This, it said, reflects a cautious but sustained risk appetite, as managers sought to balance growth opportunities with portfolio defensiveness amid evolving macroeconomic conditions.
Oliver Wade, associate in investment content at bfinance, said: “This quarter has seen a continued emphasis on risk-adjusted positioning as investors confront both macroeconomic volatility and geopolitical challenge. Private markets have experienced their weakest fundraising since 2015, driven by caution around illiquid assets.
“However, interest in real assets, particularly infrastructure and alternative real estate, has surged. Investors remain focused on rebalancing portfolios to manage risk and capture growth. Across all sectors, diversification, sustainability, and resilience remain core themes in response to fluctuating macroeconomic conditions.”
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