Filling the allocation gap: What real assets can offer US public sector plans 

Alan Synott, Global Head of Real Assets & Peter D. Grant, Public Sector Commercial Lead

Real assets have become an increasingly integral component of portfolios for public sector pension plans and large institutional investors worldwide. Infrastructure investment continues to grow in allocations, driven by resilient and increasingly stable performance across the asset class, while natural real assets are also steadily gaining traction as part of impact portfolios. Real estate — often considered the “original” real asset — has evolved with new strategies and growing sophistication among the investor base.

In spite of this growth, U.S. public-sector plans allocate significantly less to real assets than peers in Canada and Australia, about half the level of other global institutional investors. As interest in real assets grows, it is increasingly important for U.S. plans to participate in this opportunity in ways that align with their internal capabilities.

In an environment marked by persistent inflation, market disruption, and geopolitical uncertainty, real assets can offer tangible, differentiated opportunities for diversification, resilience, and sustainable yield. They can provide inflation mitigation and access to transformative, long-term trends like the energy transition, digitalization, and AI infrastructure — making them well suited for long-horizon investors.

Public sector investors typically operate with a broader purpose, aiming for societal benefit alongside financial returns. Real assets may align naturally with this mission, offering the potential for sustainable, long-term performance alongside social outcomes — from clean energy to affordable housing.

Yet despite their appeal, barriers remain, especially for public sector plans, where governance, scale, and internal capacity often shape investment strategies.

US public sector appetite for real estate and other real assets is currently low, but growing — especially for infrastructure and impact investments that can help deliver both financial and societal returns.

Mercer’s Large Asset Owner Barometer shows over half of large asset owners plan to increase real asset allocations in the next year, reflecting a global shift toward tangible, long-duration investments.¹

Additionally, the middle market has expanded beyond traditional large infrastructure projects to include higher-growth areas like energy transition, data centers, and waste management. This evolution shows real assets moving from peripheral holdings to core portfolio components. The challenge lies in ensuring public sector investors can fully participate in this shift.

The key question is how public sector plans can tap into these opportunities while managing their unique structural and operational constraints. To access sought after GPs, LPs need to move expeditiously, completing their research and committing in a timely fashion. Layered decision-making can also make it harder to commit to illiquid or complex assets like real assets.

Larger plans typically have the scale and expertise to invest directly or co-invest, gaining control, cost efficiencies, and transparency. But these plans are a small minority.

For most small and mid-sized plans, limited internal resources mean they must rely on third-party managers or specialist partners to access similar opportunities. Rigorous due diligence is essential. Our experience shows that comprehensive sourcing, screening, and due diligence can help bridge this access gap, helping to ensure this opportunity set remains open to plans of all sizes.

Success in private markets requires both access and analysis. Identifying beneficial trends and opportunities isn’t enough if you can’t execute. Strong relationships with managers and expertise to assess opportunities are critical, especially for smaller plans that risk being locked out of top funds without the right support.

Infrastructure investment illustrates this well. Growth in the asset class has led to an ever-expanding roster of managers, and returns vary widely, making manager selection crucial.

Cost matters too. Many investors leverage scale — either their own or through consultants — by making larger commitments to reach lower fee tiers and accessing co-investments, which may improve portfolio efficiency and net returns and may be offered at reduced or, in some cases, no management fees or carried interest, depending on specific terms.

Co-investments let plans commit capital to a fund while also participating in sidecar deals for immediate deployment and lower fees. When that’s not feasible, separately managed accounts (SMAs) offer a similar path.

Real assets are entering a new era. A growing opportunity set, an expanding manager universe, and new tools such as co-investments and secondaries are enabling public investors to deploy capital faster, tailor strategies, and tackle long-standing challenges.

In our view, public sector plans may stand to gain from this new era by closing their real asset allocation gap, provided they take the right approach: thorough due diligence to help ensure they’re making the right strategic decisions for their portfolios, and partnering with experienced managers to seek access to compelling opportunities at a competitive cost.

To explore how real assets can help build resilience in institutional portfolios, connect with Mercer’s Real Assets specialists.