Providers of defined contribution (DC) master trusts are directing an outsized portion of illiquid investments towards UK-based opportunities, with the majority planning to invest between 21 per cent to 30 per cent domestically and some committing over 40 per cent, Isio research has found.

The provider said that this shift reflected both the influence of 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.

It said that so far, specific allocations to UK venture capital are rare, with most providers considering this as part of a broader private equity mandate.

The research found that target allocations to illiquids vary significantly across the market – from less than 5 per cent in core defaults to up to 30 per cent in premium defaults.

Meanwhile, the single default approach is broadly in the middle (around 10 per cent).

It explained that the variance accounted for two emerging approaches to illiquid assets within default strategies, either one single default with a modest allocation to illiquids with minimal illiquids allocation, or a dual core and premium approach with a higher allocation.

Isio stated that the core and premium approach was currently the most popular in the market, with the intention to cover two different cost points and to target different levels of investor sophistication.

It said that while the scale of allocations varies significantly, the trend was clear – illiquid assets are set to play an increasingly important role in DC default investment strategies.

The research also found that master trusts are increasingly taking a multi-asset approach to private market allocations, with real assets, particularly infrastructure and property, and private equity, leading the way.

It found that these asset classes account for over two-thirds of each provider’s asset allocation.

In addition to this, the research showed that some providers are taking a greater interest in natural capital, suggesting that illiquid assets are where greater impact can be achieved from a sustainability perspective.

Isio found that master trust providers are most commonly planning to use cash to provide liquidity, closely followed by listed equities due to a desire to maintain long-term returns.
In addition to this, listed private equity, listed infrastructure, real estate investment trust, insurance-linked securities, and liquid credit are also commonly used.

The research showed that long-term asset funds remained a key implementation vehicle, but found some providers are also exploring co-investment and direct investment models within these structures.

In terms of management, the report found that master trusts said they would predominantly rely on external expertise for illiquid assets, with the majority managing less than 20 per cent of illiquid allocations internally.

Isio said that despite some master trusts planning to make use of in-house capabilities where they exist, the report found that external managers continue to play a “significant” role in providing specialist expertise.

This choice is often influenced by cost considerations, scale, and governance requirements, with some providers using a mix of both within their illiquid portfolios.

Isio partner, George Fowler, said the research showed a “clear shift” towards greater investment in illiquid assets within DC master trusts, although with significant variation in both the size of allocation and whether one or two defaults are being offered.

Fowler said this shift would 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,” he said.

“Although we believe allocating to illiquid assets has the potential to improve member outcomes, this will only happen with effective implementation, with approach to ramping up, managing liquidity and the appropriate balance between internal and external management being key areas to watch out for.”

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