How Retirement Funds Are Reshaping Private Market Liquidity: Strategic Implications for Institutional Investors and Asset Managers

The influx of retirement funds into private markets has become a defining trend of the past decade, driven by the relentless search for yield in an era of historically low returns on traditional assets. According to an AI-CIO report, public pension plans in the U.S. have seen their allocations to public equities decline from 60% in 2007 to less than half by 2021, while private equity, private credit, and real assets have expanded significantly. This shift has not been without consequence. As institutional investors pour capital into illiquid private assets, the dynamics of liquidity-both for funds and their underlying assets-are undergoing a profound transformation, with strategic implications for asset managers and institutional investors alike.

A Liquidity Paradox: Growth and Constraints

The surge in private market allocations has created a paradox. On one hand, global pension funds now hold record amounts of capital in private assets, with over 94% of pension fund leaders either invested or planning to invest in private markets, according to a Bain report. On the other, liquidity has become a pressing challenge. Data from a McKinsey report reveals that more than half of pension funds have exceeded their target allocations in private equity due to sluggish exit activity and anemic distributions. This overallocation has forced funds to turn to secondary markets to rebalance portfolios, a trend that accelerated in 2025 as secondary deal values surged.

The root of the problem lies in the mismatch between capital inflows and the pace of liquidity events. In 2023, total commitments to private markets by public pension plans fell by 24.1% year-over-year to $158.9 billion, reflecting a slowdown after three years of growth, as highlighted in the Bain report. Yet, even as new commitments waned, the pressure to deploy capital persisted. By Q3 2024, the California Public Employees' Retirement System (CalPERS) alone invested $17 billion across 67 private market strategies, including $12 billion in private equity, according to a ConnectMoney report. Such aggressive allocations, while driven by the need for higher returns, have exacerbated liquidity constraints, particularly as exit markets remain subdued.

Strategic Implications for Institutional Investors

For institutional investors, the liquidity challenges in private markets demand a recalibration of portfolio management strategies. First, diversification within private assets is critical. While private equity remains a cornerstone, investors are increasingly allocating to private debt and infrastructure, which offer more predictable cash flows and shorter investment horizons. As noted in the McKinsey report, private debt defaults have cooled in 2025, though restructurings of private equity-backed loans remain elevated, underscoring the need for selectivity.

Second, secondary markets have emerged as a vital tool for liquidity management. Pension funds are now using secondary transactions not just to offload overallocated positions but also to access mature funds with more immediate liquidity potential. This trend is expected to accelerate, with secondary market values in 2025 already showing significant growth, according to the McKinsey report. For investors, this means prioritizing secondary strategies as a core component of their private market allocations.

Third, the rise of continuation vehicles (CVs) and open-end funds is reshaping how liquidity is structured. CVs, which allow sponsors to extend the life of underperforming funds, now account for 20% of private equity exits in 2025, the McKinsey report finds. While these structures provide a lifeline for general partners (GPs) struggling to deploy dry powder, they also require limited partners (LPs) to accept lower returns in exchange for flexibility. Institutional investors must weigh these trade-offs carefully, particularly as 26% of global buyout dry powder now exceeds four years in age, per the Bain report.

Strategic Implications for Asset Managers

Asset managers, meanwhile, face a dual challenge: adapting fund structures to meet LP demands while maintaining returns. The traditional private equity model, with its long lock-up periods and illiquid assets, is being tested by a new generation of LPs who prioritize liquidity metrics like Distributions-to-Paid-In (DPI). Bain highlights that GPs are increasingly innovating in fund design, including the use of open-end funds and co-investment vehicles, to align with these expectations.

Moreover, the pressure to deploy capital is forcing GPs to rethink value creation. In a market where 30% of LPs plan to increase private equity allocations in the next 12 months, the McKinsey report notes, managers must demonstrate not just returns but also transparency and agility. This includes leveraging technology for better portfolio monitoring and adopting ESG frameworks that resonate with institutional investors focused on long-term sustainability.

The Road Ahead

The transformation of private market liquidity is far from complete. While 2024–2025 has seen a "selective thaw" in liquidity, the McKinsey report cautions that the industry remains in a period of transition. For institutional investors, the key will be balancing the pursuit of yield with the realities of illiquidity. For asset managers, innovation in fund structures and operational efficiency will be paramount. As the California Public Employees' Retirement System has shown, bold allocations to private markets can drive growth-but only if liquidity risks are managed with equal rigor.

In the end, the influx of retirement funds into private markets is not merely a shift in asset allocation. It is a redefinition of how liquidity is conceived, structured, and managed in an era where the lines between public and private capital are blurring.