In a recent government meeting, officials discussed a strategic approach to increasing allocations in private equity and private debt while managing associated risks through liquid substitutes. The proposal aims to gradually enhance private equity exposure to 20% over four years, utilizing public equity as a liquid substitute that mirrors private equity returns. This method allows for direct liquidity to fund capital calls as commitments are drawn down.

The plan involves a systematic annual increase of 1% in private equity allocations, counterbalanced by a corresponding decrease in the liquid substitute. This approach is designed to optimize the risk-return profile of the fund while ensuring that the transition remains orderly and manageable.

Officials emphasized the importance of annual reviews of the investment policy, allowing for adjustments based on market conditions and performance. The board's decision to pursue this strategy reflects a commitment to higher expected returns with slightly lower risk, aligning with best practices in governance.

For private debt, a similar strategy is proposed, with a planned increase of 2% per year over three years, supported by a liquid substitute that decreases correspondingly. The Credit Suisse Leveraged Loan Index has been identified as the benchmark for this private debt exposure, while the Russell 2000 Index serves as the benchmark for the public equity substitute.

The meeting concluded with a recommendation to establish defined policy and strategy benchmarks, ensuring that the fund's allocations to private markets and their liquid substitutes are effectively managed over time. This structured approach aims to enhance the fund's overall performance while adhering to the board's directives.