The KKR Insights: Global Macro Trends "Wisdom in Curiosity" October 2019 thought piece provides more sobering information on return expectations for the next five years. Every investment return is expected to be lower except for cash, hedge funds, and emerging market equities. Cash and hedge funds will be higher but still below any pension discount rate.
However, on a relative basis, private equity should do better and will be the only investment with double double digit expected returns. It is the only investment that will have the opportunity to offset the low returns from traditional assets. Overall, the only places to get return are asset classes of greater risk and lower liquidity.
The KKR CIO survey suggests that those investments that have less liquidity will be the sectors that are expected to have the most attractive risk to reward. This should not be surprising. The illiquid investments usually have lower volatility given accounting practices for pricing (no daily mark to market), and investors should expect higher returns for the same level of risk given the investments may not be sold immediately. There is a illiquidity risk premia. Of course, the measurement and size of this illiquid risk premium is up for much debate.
The strong demand for private equity is just the continued response to low bond yields, continued low cash rates, and less favorable equity valuations. If there is the expectation of a financial downturn, some investor perceive that private transactions will not be disturbed by any rush for liquidity. However, there are limits to illiquid allocations, so investors still have to be on the look-out for unique opportunities or risk premia that may offer liquidity with upside.