Local government pension funds are set to invest more in private markets due to increased confidence in the levels of transparency and a need to diversify, new research has revealed.

Alpha Real Capital, a specialist manager of secure income real assets, has surveyed Local Government Pension Scheme (LGPS) professionals and found that 91% believe the funds they work for will increase their allocation to private markets.

The majority of the 100 LGPS fund managers who took part in the research (60%) think their allocation will rise by between 5% and 10%.

Alpha says this is part of a trend of institutional investors increasing their allocation to illiquid assets, such as real estate and infrastructure, which are providing increasingly attractive returns and diversification benefits.

An Alpha study carried out last year with 100 UK professional pension fund investors by the specialist real assets manager found schemes already have substantial allocations to illiquid assets – around 58% of investors said their scheme allocated up to 25% to illiquid assets as part of their investment strategy, and 37% said they allocated up to 10%.

The study found the main reason for increasing interest in illiquid assets is greater transparency around the asset class - 79% of those pension professionals surveyed last year said that they planned to increase allocations because of this.

However, 69% said increased opportunities to invest in illiquid assets is driving interest, and 44% of those questioned said they are increasing allocations to illiquid investments because of a growing desire to diversify their portfolios.

Boris Mikhailov, head of client solutions Alpha Real Capital, said: ‘Private markets, and in particular secure income real assets, are growing in popularity amongst LGPS Funds as they offer the potential to provide secure, inflation-linked cashflows to help meet liabilities in an inflationary environment. It is also important to note that secure income real assets like social or renewable infrastructure have quantifiable and measurable ESG benefits. It is possible to invest in these assets to help with ‘E’ or ‘S’ in ESG without sacrificing much needed investment performance.’

Phillip Rose, CEO Alpha Real Capital, said: ‘Globally, private markets rallied to new heights in 2021 with a significant rise in fundraising, and assets under management (AUM) grew to an all-time high of nearly $10 trillion. Given the many attractions of private markets such as long-income real estate, social infrastructure and renewables infrastructure, including predictable income, inflation linkage and low volatility, we expect LGPS to significantly increase their allocation to these asset classes over 2022 and beyond.’