UAO Research · June 3, 2026 · Pensions & Retirement · Feeds: Pension Strategy Watch
For thirty years the textbook answer was settled: a pension fund, with liabilities that stretch decades and a balance sheet that does not face redemptions, is the natural holder of illiquid assets. It can lock up capital that others cannot, and harvest the premium that locking up is supposed to earn. That logic powered a generation of migration into private equity, private credit, real estate and infrastructure. As two of the most-watched U.S. public funds reset their private-markets exposure in opposite directions on July 1, the question underneath the consensus is suddenly live again: is the illiquidity premium still actually being paid — and if so, to whom?
What the evidence says
Start with scale, because it frames the stakes. The OECD's Pension Markets in Focus 2025 put global asset-backed pension assets at roughly $70 trillion at the end of 2024, with pension providers managing about $63 trillion and public reserve funds the remainder Pension Markets in Focus 2025, OECD, November 2025.. A meaningful and rising share of that capital now sits in private markets. The structural case for it is real: the academic literature has long held that investors who can tolerate illiquidity should be compensated for it, and that the discount on hard-to-sell assets is the mirror image of the premium a patient holder can earn The Liquidity Cost of Private Equity Investments, NBER Digest.. Asset managers make the same argument in commercial terms: illiquidity, in one house's framing, is "a feature, not a flaw," provided the duration of the capital is matched to the duration of the assets In Private Credit, Illiquidity Is a Feature, Not a Flaw, AllianceBernstein. — a house view, and worth weighing as one.
The harder evidence is on price. Marcus Frampton, who runs the Alaska Permanent Fund, has argued the premium has compressed to the point of disappearing: U.S. mid-market buyouts that once changed hands at five-to-six times EBITDA now trade in the mid-teens, leaving little room for the return that illiquidity is meant to buy Alaska Permanent Fund CIO Warns Private Markets Have Lost Their Edge, Private Markets Insights, May 2026.. His fund is acting on that read, trimming private equity, real estate and private income from July 1. And the Financial Stability Board, in its May report, supplied the systemic counterpart to the price concern: it estimated the private-credit market at $1.5–2.0 trillion at end-2024 and flagged valuation opacity, leverage hidden in multi-layered structures, and liquidity terms that could turn procyclical — while admitting it could directly observe only about $220 billion of credit lines, perhaps less than half the true figure Report on Vulnerabilities in Private Credit, Financial Stability Board, May 6, 2026..
Where it is contested
Here the honest answer is that the evidence does not point one way. The structural case has not been refuted — long-dated owners genuinely can hold what others cannot, and the largest funds may still command terms, access and co-investment economics that smaller allocators cannot. Frampton's bear case is a price call, not a repeal of the principle; it says the premium has thinned at current valuations, not that illiquidity can never pay. And the FSB report is explicitly a warning about data gaps, not a finding of imminent loss — the most candid thing in it is the admission of how little supervisors can see. Meanwhile the larger group of public pensions is reaching the opposite practical conclusion, with Washington State, Connecticut and Virginia all building private-credit targets into the new fiscal year. They are not naive; they are betting that spread, seniority and floating-rate structures still compensate, and that their own terms are better than the system-wide average the FSB worries about. Both camps are staffed by competent fiduciaries reading much of the same data. That is what makes this a genuine disagreement rather than a clear error by one side.
From the allocator's seat
For the CIO of a large owner, the useful move is to stop treating "private markets" as a single allocation decision and break it into the three things that actually determine whether the premium is paid: price, terms and liquidity. On price, the discipline Frampton models — refusing to re-underwrite at mid-teens multiples what penciled out at six times — is portable to any committee, and it argues for pacing and vintage diversification over a fixed target hit every year regardless of entry valuation. On terms, the FSB's data-gap warning translates into a checklist: what do the covenants actually allow, how is the book marked, and who else is senior. On liquidity, the redemption gates that spread across non-traded vehicles in late 2025 are the reminder that a premium earned on paper is only real if the structure lets a long-horizon holder behave like one — and does not force a sale at the wrong moment because retail co-investors are heading for the exit. The question to put to every private-markets manager this summer is not "what is the target return" but "show me where the illiquidity premium is in this structure, net of fees, and what could make it disappear."
What to watch next
Four near-dated signals will sharpen the picture. First, July 1 itself: both the Alaska recalibration and the CalPERS Total Portfolio Approach take effect, and the latter's single 75/25 reference portfolio will make it harder for staff to justify private allocations that do not beat a simple public benchmark. Second, the CalPERS Performance, Compensation & Talent Management Committee meets June 16 to weigh tying staff incentives to total-fund results — a governance change other funds will copy if it sticks. Third, the FSB has committed to closing the data gaps it identified, so watch for its follow-up workstream and any harmonised reporting. Fourth, the redemption picture in non-traded private-credit vehicles through the summer will test, in real time, whether the liquidity mismatch the FSB flagged is theoretical or live.
Sources
- Pension Markets in Focus 2025, OECD, November 2025.
- Report on Vulnerabilities in Private Credit, Financial Stability Board, May 6, 2026 (PDF).
- The Liquidity Cost of Private Equity Investments, NBER Digest.
- In Private Credit, Illiquidity Is a Feature, Not a Flaw, AllianceBernstein.
- Alaska Permanent Fund CIO Warns Private Markets Have Lost Their Edge, Private Markets Insights, May 2026.
- Alaska Permanent Fund Corp. follows through on private markets pullback, Pensions & Investments, May 2026.
UAO Research. AI-assisted monitoring and drafting; reviewed and edited by the UAO editorial desk before publication. Not investment advice.
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