The financial press is currently obsessed with a "crisis" that doesn't exist. You’ve seen the headlines: UK pension funds are supposedly "trapped" in private assets, facing "eye-watering" costs to exit. The narrative suggests that defined benefit (DB) schemes, in their rush toward the exit door of insurance buy-outs, are being held hostage by the very illiquid assets they once championed.
It’s a neat story. It’s also fundamentally wrong.
What we are witnessing isn't a liquidity crisis. It is a massive failure of institutional imagination and a misunderstanding of what "value" actually means in a high-interest-rate environment. The "huge costs" everyone is complaining about are actually the market finally pricing risk correctly after a decade of central bank-induced fantasy.
The Myth of the Secondary Market Penalty
The standard argument goes like this: Pension funds need to sell private equity, private credit, and infrastructure stakes to get "buy-out ready." Because these assets aren't traded on an exchange, funds have to sell them on the secondary market at a 20% or 30% discount. Therefore, the funds are "losing" money.
Let’s look at the mechanics of a secondary sale. When you sell a stake in a private equity fund at a 25% discount to Net Asset Value (NAV), you aren't necessarily "losing" 25%. You are likely acknowledging that the NAV—a figure calculated by the fund manager themselves—was a work of fiction.
For years, private market valuations have been shielded from the volatility of public markets. While the S&P 500 or the FTSE 100 swung wildly, private asset valuations stayed suspiciously flat. Now that funds need cash, the secondary market is acting as a truth machine. That "cost" to sell is simply the gap between a manager’s optimistic spreadsheet and what a rational buyer will actually pay.
If you think a 20% haircut is a "cost," you’ve been staring at the wrong ledger for five years. The cost occurred when you overvalued the asset on your books; the sale just makes you admit it.
The Buy-out Obsession is a Strategic Blunder
The rush to insurance buy-outs is the ultimate "lazy consensus." Trustees are terrified of volatility, so they are paying insurers massive premiums to take the problem off their hands. In doing so, they are liquidating high-yielding private assets at the worst possible time.
Think about the logic. An insurer takes your assets, charges you a fee for the privilege, and then... invests in those same types of private assets to generate the yield required to pay the pensions.
We are seeing a massive transfer of wealth from pension members to the balance sheets of massive insurance companies. Why? Because the industry has decided that "certainty" is worth any price.
I’ve sat in rooms where consultants suggest selling a portfolio of high-quality infrastructure assets—which provide inflation-linked cash flows—at a deep discount just to satisfy the accounting requirements of a buy-out. This isn't risk management. It’s a fire sale of the crown jewels to buy a more expensive version of the same thing.
Why High Interest Rates Aren't the Enemy
The "experts" claim that the rise in interest rates killed the private asset market. They argue that because the "risk-free" rate (government bonds) is now 4% or 5%, the 8% return from a private credit fund isn't worth the hassle.
This ignores the fundamental nature of these assets.
In a world of persistent inflation, you don't want a pile of nominal bonds. You want assets with pricing power. You want the toll road. You want the specialized manufacturing plant. You want the private debt with floating rates.
The "cost" of selling these assets isn't just the discount on the sale; it’s the massive opportunity cost of what you’re giving up. Pension funds are currently dumping assets that are perfectly suited for the next decade because they are obsessed with the accounting metrics of the last one.
The Liquidity Buffer Fallacy
One of the loudest complaints is that "illiquidity" prevented funds from rebalancing during the 2022 LDI (Liability Driven Investment) crisis.
Let's be clear: the LDI crisis wasn't caused by private assets. It was caused by an insane level of leverage in the "liquid" part of the portfolio. Blaming a private equity stake for your inability to meet a margin call on a derivative is like blaming your house for your credit card debt.
If a fund is so tightly wound that a 200-basis-point move in Gilt yields triggers a systemic collapse, the problem isn't the 10% of the portfolio in "illiquid" assets. The problem is the 90% of the portfolio that was being used as a casino chip.
Stop Trying to Fix the Exit, Fix the Hold
Instead of whining about the cost of selling, trustees should be asking why they are selling at all.
- Run-off is an Option: Not every fund needs a buy-out. A well-funded DB scheme can "run off," paying members from the cash flow of the assets. In this scenario, the "market price" of a private asset is irrelevant. Only the cash it generates matters.
- Negotiate with Insurers: Insurers are hungry for assets. Instead of selling on the secondary market for cash, funds should be pushing for "in-specie" transfers. Make the insurer take the private assets as they are. If the insurer demands a massive discount, walk away.
- Admit the NAV Fraud: Stop using internal valuations to judge performance. If you want to know what your private assets are worth, look at the secondary market every month, not every year. Transparency would stop these "shocks" from happening.
The Real Cost is Cowardice
The "huge costs" cited by the industry are a self-inflicted wound. They represent the price of a herd mentality. When everyone tries to squeeze through the same exit door at the same time—the buy-out door—the price of the door goes up.
We are currently seeing a massive misallocation of capital driven by regulatory pressure and a desire for "quiet" balance sheets. The losers are the UK economy, which loses long-term investment, and the pension members, whose surpluses are being handed over to insurers.
The industry doesn't need more liquidity. It needs more backbone.
Stop treating private assets as a "problem" to be liquidated. They are the only things in your portfolio that actually represent real-world value in an era of debased currency and soaring debt. If you can't handle a 20% swing in the price of an asset you plan to hold for 30 years, you shouldn't be in the business of managing money.
The secondary market isn't broken. Your strategy is.
Stop selling. Start holding. Or admit you never understood what you were buying in the first place.
