Health-Care Systems Want More Alternative Assets. But Can They Get Them?

Low yield from traditional fixed income won’t suffice for hospital systems, according to Cerulli.

Nicolo Filippo Rosso/Bloomberg

Nicolo Filippo Rosso/Bloomberg

Health and hospital systems are seeking bigger allocations to alternative assets in order to meet their return targets, according to a survey by Cerulli Associates.

They want more private equity, in particular, viewing the asset class as a way to overcome the challenge of low interest rates, Cerulli said in a report Thursday. Their investment pools have traditionally relied on fixed-income securities, which no longer yield enough for their needs.

Health and hospital organizations may be more complex than other types of institutional investors as they tend to manage multiple investment pools, including endowments, foundations, and retirement funds, according to the report. Some are turning to outsourced-CIO providers for help in finding exposure to alternative assets, as they are too small and understaffed to invest in these asset classes on their own.

“Health and hospitals systems are located far and wide, often outside areas with strong financial services industry, making it difficult to recruit, hire, and retain investment staff,” Cerulli said. It remains to be seen whether hospitals move all their assets to OCIO firms, or “only a sleeve of the portfolio” in which they lack expertise or scale to invest with alternative mangers.

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An OCIO firm may pool assets of several health and hospital systems in order to give them access to alternative assets that large institutional investors include in their portfolios, according to the report. Sixty percent of health institutions polled last year by Cerulli cited access to top investment managers as a problem, while the same percentage of those surveyed planned to increase private equity allocations in their long-term investment pools.

Meeting return goals and dealing with low interest rates are the biggest investment challenges for health and hospital systems, according to Cerulli. “Maintaining adequate liquidity,” getting access to top investment managers, and a lack of resources are the next biggest challenges, the survey found.