Why Pension Funds Are Investing in Pharmaceutical Royalties
The Pension Fund Challenge—And Why Royalties Address It
Defined benefit pension plans face a structural dilemma: actuarial assumptions of 6-7% annual returns must be met against a backdrop of compressed fixed income yields and elevated equity valuations. Traditional 60/40 portfolios no longer generate sufficient risk-adjusted returns to meet long-term obligations, pushing allocators toward alternatives that offer equity-like returns with bond-like predictability.
Pharmaceutical royalties have emerged as a solution. The asset class delivers mid-teens gross returns (12-16% net to LPs), low correlation to equity and credit markets, predictable quarterly cash flows tied to prescription drug sales, and duration profiles that naturally match pension liability runoff. These characteristics explain why sophisticated pension allocators—from Canada's largest plans to U.S. state teachers' retirement systems to UK railway workers' funds—have committed billions to the space.
This analysis examines the documented positions, stated rationales, and performance outcomes of pension funds that have allocated to pharmaceutical royalties, either as limited partners in specialized funds or as direct investors acquiring royalty streams.
What Pension Funds Have Achieved: Documented Performance
CalSTRS: 14.1% Net IRR vs. 7% Actuarial Assumption
The California State Teachers' Retirement System ($367.7B AUM) provides the most transparent public disclosure on pharmaceutical royalty fund performance. CalSTRS committed $75M to OrbiMed Royalty & Credit Opportunities IV in October 2023, with results as of September 2025:
| Metric | Value | Context |
|---|---|---|
| Net IRR | 14.1% | 2x CalSTRS's 7% actuarial assumption |
| Commitment | $75M | ~0.1% of total PE allocation |
| Contributed | $46.8M | 62% deployed |
| Distributed | $23.8M | 0.51x DPI |
| Remaining value | $50.4M | 1.08x RVPI |
| TVPI | ~1.6x | Strong interim multiple |
The 14.1% net IRR materially exceeds CalSTRS's overall private equity portfolio since-inception return of 11.1% (as of March 2025). This outperformance led CalSTRS to re-commit $75M to OrbiMed Fund V in 2024-25—a programmatic allocation signaling conviction in the asset class rather than opportunistic deployment.
CPP Investments: C$3 Billion Deployed Since 2011
Canada Pension Plan Investment Board (C$777B AUM) pioneered direct pension fund royalty investing, building an in-house intellectual property program that has deployed approximately C$3 billion across pharmaceutical and technology royalties. Per CPP Investments' public statements, the program targets "alternative assets related to intellectual property [that] help to diversify the Fund through income streams that are typically uncorrelated to the broader capital markets."
CPP Investments' documented pharmaceutical royalty transactions demonstrate the return profile:
| Year | Asset | Amount | Structure | Estimated IRR |
|---|---|---|---|---|
| 2017 | Venetoclax | Up to $325M | Academic royalty acquisition | Low double-digits |
| 2020 | Keytruda | $1.3B | Charitable foundation royalty | Low double-digits |
| 2024 | Attruby | $200M | 5% synthetic royalty, 1.9x cap | Teens |
OMERS: $2 Billion+ Healthcare Credit and Royalty Program
OMERS (C$145B AUM) has invested over $2 billion in healthcare credit and pharmaceutical royalties since launching its Life Sciences program in 2016. Managing Director Rob Missere characterizes the strategy as "building out a diversified portfolio of pharmaceutical assets that we believe can provide a reliable source of uncorrelated and differentiated return for OMERS."
OMERS's ~$900M cumulative position in Crysvita royalties (Ultragenyx) represents the largest documented single-asset pension royalty allocation globally.
Railpen: £800M Allocation (~3% of Growth Fund)
UK rail workers' pension fund Railpen (£34B AUM) allocated approximately £800M to healthcare royalties in 2024—the largest documented single pension allocation to the asset class. Director of Public Markets Craig Heron positioned royalties "alongside other alternative, diversifying exposures such as natural catastrophe reinsurance and a trend-following strategy," targeting "high single digit, or low double digit return over the long-term."
Why These Returns? The Asset Class Fundamentals
Pension funds achieving 12-16% net returns in pharmaceutical royalties benefit from several structural characteristics:
Royalty Pharma (NASDAQ: RPRX) provides a public market benchmark for the underlying economics:
| Metric | Value | Pension Relevance |
|---|---|---|
| Unlevered IRR (2020-2025) | Mid-teens | Achievable without leverage risk |
| ROIC | 15.7% | Capital efficiency |
| Adjusted EBITDA margin | 95.8% | Minimal operational leakage |
| Development-stage success rate | ~90% | Underwriting track record |
The 95.8% EBITDA margin reflects the fundamental nature of royalty investing: no manufacturing, no sales force, no R&D spend—just contractual claims on revenue streams. This operational simplicity translates to predictable cash flows that pension allocators can model with confidence.
Private fund return profiles (based on HCRx/KKR data) show how pension LPs access different risk-return tranches:
| Structure | Typical IRR | Risk Profile | Pension Fit |
|---|---|---|---|
| Approved product royalties | 7-12% | Lower | Liability matching |
| Synthetic royalties | 10-15% | Moderate | Core allocation |
| Development-stage | Mid-teens+ | Higher | Return enhancement |
| Blended portfolio | 12-16% net | Diversified | Typical LP exposure |
How Pension CIOs Evaluate Royalties: Risk-Adjusted Analysis
The Volatility Question
Pension investment committees evaluating pharmaceutical royalties ask: what drives variance, and how does it compare to existing portfolio exposures?
Primary Variance Sources:
- Prescription volume — typically ±5-15% around consensus for established products
- Pricing/reimbursement — binary but infrequent (IRA negotiation, Medicaid rebates)
- Competitive entry timing — modeled in underwriting, subject to FDA approval uncertainty
- Label expansion — upside variance from additional indications
Why Pension Allocators Accept This Risk:
Unlike private equity (EBITDA volatility + leverage) or direct lending (credit losses + defaults), royalty volatility stems from healthcare utilization—fundamentally uncorrelated to economic cycles, credit spreads, or interest rates. This makes royalties valuable portfolio diversifiers even if absolute volatility were equivalent.
Observed Volatility (Public Proxy):
| Metric | RPRX | XBI (Biotech) | S&P 500 |
|---|---|---|---|
| Daily volatility | 1.17% | ~2.5% | ~1.0% |
| Annualized volatility | ~18% | ~40% | ~16% |
Private fund IRR volatility is structurally lower due to NAV smoothing and quarterly marks on contractual cash flows.
Why Low Correlation Matters for Pension Portfolios
Pension CIOs prize pharmaceutical royalties for correlation characteristics that enhance portfolio efficiency:
| Correlation | Pharma Royalties | Direct Lending | PE Buyout |
|---|---|---|---|
| vs. S&P 500 | ~0.3 | ~0.5 | ~0.7 |
| vs. IG Credit | ~0.2 | ~0.6 | ~0.4 |
| vs. Healthcare Equity | ~0.4 | ~0.3 | ~0.5 |
Why correlations are low:
- Healthcare demand inelasticity — prescription drug utilization is acyclical
- Revenue predictability — approved products have <15% forecast variance
- No GDP beta — cash flows driven by epidemiology, not economic growth
- Patent-driven duration — finite life assets with knowable expiry
Per Cambridge Associates' September 2025 pension research, royalties are categorized alongside "insurance and asset-backed credit" as strategies providing "low correlation to traditional markets."
Railpen's Craig Heron explicitly positions royalties in this context, allocating alongside "natural catastrophe reinsurance and a trend-following strategy"—all alternative risk premia uncorrelated to equity beta.
Risk-Adjusted Return: Sharpe Ratio Analysis
Using Royalty Pharma public data as a proxy:
| Assumption | Value |
|---|---|
| Expected return (ROIC) | 15.7% |
| Risk-free rate (5Y Treasury) | ~4.2% |
| Standard deviation (annualized) | ~18% |
| Sharpe Ratio | ~0.64 |
For private funds with lower observed volatility (~12% annualized), Sharpe ratios approach 0.9-1.0—top quartile among private credit strategies.
Comparative Sharpe Ratios (What Pension Allocators Compare Against):
| Asset Class | Typical Sharpe | Pension Allocation Context |
|---|---|---|
| Private equity (buyout) | 0.5-0.7 | Core alternatives |
| Private credit (direct lending) | 0.6-0.8 | Income allocation |
| Pharmaceutical royalties | 0.8-1.0 | Diversified growth |
| Infrastructure | 0.4-0.6 | Real assets |
| Real estate | 0.3-0.5 | Real assets |
Why Royalties Fit Pension Liability Profiles
Duration Matching: A Natural Fit
Unlike perpetual equities that require terminal value assumptions, pharmaceutical royalties have finite lives that naturally match pension liability runoff:
| Royalty Type | Typical Duration | Pension Liability Match |
|---|---|---|
| Approved product (5-7yr patent remaining) | 4-6 years | Intermediate liabilities |
| Development-stage | 8-12 years | Long-dated liabilities |
| Blended portfolio | 6-8 years | Core liability profile |
For a maturing DB plan with 7-year average liability duration, a blended royalty portfolio provides natural cash flow matching without the reinvestment risk of rolling bond portfolios.
Cash Flow Predictability for Benefit Payments
Pension plans must meet monthly benefit obligations. Pharmaceutical royalties provide quarterly distributions with high predictability:
| Metric | Pharmaceutical Royalties | Private Credit | Infrastructure |
|---|---|---|---|
| Cash flow visibility | Quarterly, contractual | Quarterly, floating | Semi-annual, fixed |
| Forecast accuracy (1yr) | ±10-15% | ±5% | ±3% |
| Upside optionality | Yes (label expansion) | Limited | No |
| Downside protection | Partial (cap structures) | Collateral | Regulated returns |
The ±10-15% forecast variance is higher than infrastructure but comes with 600-1000bps additional return. For plans that can tolerate modest cash flow variability in exchange for superior returns, royalties offer an attractive tradeoff.
Funded Status Stability
Per KKR's October 2025 corporate pension research, alternative fixed income strategies including specialty finance "can support funded status stability, improve portfolio diversification, and provide predictable cash flow to meet projected benefit payments."
The combination of mid-teens returns (well above 6-7% discount rates), low correlation to rates and equities, and predictable quarterly distributions positions pharmaceutical royalties as funded status enhancers—generating returns that exceed liability growth while diversifying away from equity and duration risk.
How Canadian Pensions Access Royalties: Direct Investment Programs
Canadian pension funds have developed the most sophisticated direct royalty investing capabilities globally, bypassing third-party fund managers to acquire royalty streams directly from biotech companies, academic institutions, and charitable foundations. This approach captures 100-200bps of fee savings while enabling bespoke deal structuring.
CPP Investments: Building In-House IP Expertise
CPP Investments (C$777B as of September 2025) pioneered direct pension fund pharmaceutical royalty investing, deploying approximately C$3 billion through its intellectual property program since 2011. The strategy sits within the Principal Credit Investments (PCI) group, led initially by John Graham (now CEO), which has invested over C$30 billion in global credit markets.
Why CPP Investments Chose Direct Investing:
Per public statements, the pharmaceutical royalty strategy targets:
- Uncorrelated income streams: "Alternative assets related to intellectual property help to diversify the Fund through income streams that are typically uncorrelated to the broader capital markets"
- Stable, long-term cash flows: Emphasis on "proven" and "market-leading" therapies with established commercial track records
- Fee efficiency: Direct origination avoids 1.5% management fees and 20% carry typical of fund structures
How CPP Investments Structures Deals:
| Year | Asset | Counterparty | Structure | Amount | Est. IRR |
|---|---|---|---|---|---|
| 2017 | Venetoclax | Walter & Eliza Hall Institute | Academic royalty acquisition | Up to $325M | Low double-digits |
| 2020 | Keytruda | LifeArc (UK charity) | Charitable foundation royalty | $1.3B | Low double-digits |
| 2024 | Attruby | BridgeBio | 5% synthetic royalty, 1.9x cap | $200M | Teens |
The Keytruda acquisition illustrates the direct investing advantage: CPP Investments acquired royalty rights from LifeArc (a UK charitable foundation) rather than Merck directly. This structure provides contractual cash flows without counterparty credit risk to the biotech issuer—the royalty is a claim on product revenue, not corporate debt.
Portfolio Diversification:
| Asset | Therapeutic Area | Counterparty Risk | Patent/Exclusivity |
|---|---|---|---|
| Keytruda | Oncology | Merck (AA-rated) | Through 2028+ |
| Venetoclax | Hematology | AbbVie/Roche | Through 2029+ |
| Attruby | Cardiology | BridgeBio | Through 2030s |
Growth Trajectory: CPP Investments is expanding credit investments from ~C$62B to C$115B by 2029 (85% increase). Pharmaceutical royalties—characterized as "IP-backed credit" with contractual cash flows and collateral value—fit this expansion.
OMERS: Specialized Team, Concentrated Conviction
OMERS (C$145B as of December 2024) has built the most specialized internal pharmaceutical royalty capability among pension funds through its Life Sciences team, investing over $2 billion since 2016.
Why OMERS Built a Dedicated Team:
Managing Director Rob Missere leads OMERS Life Sciences with a background uniquely suited to direct pharmaceutical investing:
- Former Portfolio Manager at CPP Investments (learned the playbook)
- Former GlaxoSmithKline analyst (pharmaceutical industry expertise)
- CFA charterholder with MBA (financial structuring capability)
Per Missere: "We have been focused on building out a diversified portfolio of pharmaceutical assets that we believe can provide a reliable source of uncorrelated and differentiated return for OMERS by investing in drug royalties."
OMERS's Investment Philosophy:
From Missere's published interviews:
- Focus: "Almost exclusively biopharma" within healthcare
- Objective: "Reliable source of uncorrelated and differentiated return"
- Competitive advantage: "Long-term investor with the capital and expertise to support innovative life sciences companies"
How OMERS Deploys Capital:
| Year | Asset | Structure | Amount | Missere's Stated Rationale |
|---|---|---|---|---|
| 2021 | ORLADEYO | Tiered, capped royalty | $150M | "Direct exposure to a high-quality pharmaceutical asset" |
| 2022 | Crysvita | 30% NA royalty, 1.45x cap | $500M | "Product that has made a difference for so many" |
| 2024 | Ohtuvayre | Part of $650M facility (with Oaktree) | — | COPD market opportunity |
| Nov 2025 | Crysvita expansion | Add'l 25% NA royalty, 1.55x cap | $400M | "Proud to expand our investment" |
OMERS's Concentrated Bet on Crysvita:
Cumulative Crysvita exposure: ~$900M representing ~0.6% of total OMERS assets—the largest single-asset royalty position among documented pension allocations globally.
| Tranche | Amount | Royalty % | Cap | Status |
|---|---|---|---|---|
| 2022 | $500M | 30% NA sales | 1.45x ($725M max) | Paying |
| 2025 | $400M | 25% NA sales | 1.55x ($620M max) | Payment holiday until 2028 |
Why such concentration? OMERS's specialized team underwrites asset-specific risk factors:
| Risk Factor | Crysvita Mitigation |
|---|---|
| Competitive entry | Orphan drug exclusivity + biological complexity |
| Pricing pressure | Rare disease protected from IRA negotiation |
| Patent cliff | 2030+ protection for pediatric indication |
| Cap structure | 1.45x/1.55x caps bound downside scenarios |
The November 2025 expansion—where Ultragenyx noted OMERS "again offered the most attractive financial package and cost of capital"—demonstrates how specialized teams can win competitive processes against other royalty investors.
How U.S. Pensions Access Royalties: LP Commitments to Specialized Funds
Unlike Canadian pensions with in-house teams, U.S. public pension funds access pharmaceutical royalties primarily as limited partners in specialized funds. This approach suits plans that lack the internal resources for direct deal origination but want exposure to the asset class.
Why U.S. Pensions Choose Fund Structures
| Factor | Direct Investing | Fund LP |
|---|---|---|
| Internal resources required | 5-10+ specialists | 1-2 for monitoring |
| Minimum efficient scale | $500M+ | $30M commitment |
| Diversification | Self-constructed | Manager-provided |
| Fee structure | Internal cost only | 1.5% mgmt + 20% carry |
| Deal access | Must originate | Manager network |
For most U.S. public pensions, the fund LP model offers superior risk-adjusted access despite fee drag.
Pension Commitments to OrbiMed Funds
OrbiMed Fund V closed at $1.86B in August 2025 with >90% LP re-up rate—a metric that signals pension allocator satisfaction with prior fund performance.
| Pension | Fund | Commitment | Date | Performance |
|---|---|---|---|---|
| CalSTRS | Fund IV | $75M | Oct 2023 | 14.1% net IRR |
| CalSTRS | Fund V | $75M | 2024-25 | Early stage |
| TCDRS | Fund IV | $150M | 2022 | — |
| TCDRS | Fund V | $150M | Nov 2024 | Early stage |
| SFERS | Fund V | $85M | Early 2025 | Early stage |
| KCERA | Fund V | $30M | Feb 2025 | Early stage |
CalSTRS: Why Re-Commit After 14.1% Net IRR
The California State Teachers' Retirement System ($367.7B AUM) provides the most transparent disclosure on why pharmaceutical royalties work for pension portfolios.
OrbiMed Fund IV Results (as of September 2025):
| Metric | Value | Pension Significance |
|---|---|---|
| Net IRR | 14.1% | 2x CalSTRS's 7% actuarial assumption |
| DPI | 0.51x | Strong early distributions for cash flow planning |
| RVPI | 1.08x | Unrealized value exceeds contributed capital |
| TVPI | 1.59x | Top quartile vs. CalSTRS PE portfolio (11.1% SI) |
Strategic Significance:
The 14.1% net IRR materially exceeds:
- CalSTRS's 7% actuarial assumption (200% of target)
- CalSTRS's overall PE portfolio since-inception IRR of 11.1% (as of March 2025)
- CalSTRS's 8.5% total fund return for FY2024-25
Implied gross IRR of 18-20% (after typical 1.5% management + 20% carry) positions pharmaceutical royalties at the upper end of CalSTRS's risk-adjusted return spectrum.
CalSTRS Investment Philosophy:
CalSTRS uses dollar-weighted IRR to measure portfolio performance per Association of Investment Management and Research recommendations. The fund emphasizes that "IRR calculated for partnerships in the first three years of a partnership life are particularly not meaningful" due to J-curve effects—making Fund IV's 14.1% IRR (vintage 2022, 3 years in) increasingly reliable as a performance indicator.
Re-commitment Pattern:
CalSTRS's decision to re-up with a matching $75M commitment to Fund V (2024-25) signals conviction in the asset class following strong Fund IV performance. The consistent commitment sizing suggests a programmatic allocation rather than opportunistic deployment.
TCDRS: Largest Documented Single-Fund LP Position
The Texas County & District Retirement System (~$45B AUM) has committed $300M aggregate to OrbiMed Royalty & Credit Opportunities (Fund IV + Fund V), representing the largest documented single-LP position in pharmaceutical royalty funds.
Commitment Profile:
| Fund | Commitment | Date | Context |
|---|---|---|---|
| Fund IV | $150M | 2022 | Initial allocation |
| Fund V | $150M | Nov 2024 | Re-up at identical size |
The Fund V commitment was part of a $225 million allocation to healthcare-focused private funds in late 2024, signaling TCDRS's strategic conviction in healthcare credit broadly and pharmaceutical royalties specifically.
Strategic Rationale:
TCDRS's significant ($150M per fund) commitment sizing reflects:
- Sufficient AUM (~$45B) to support institutional-scale allocation
- Conviction in healthcare as a defensive growth sector
- Alignment with TCDRS's liability-matching objectives
- Confidence in OrbiMed's platform and track record
SFERS & KCERA: Emerging Pension Allocators
San Francisco Employees' Retirement System (SFERS):
- Fund V commitment: $85M (early 2025)
- Represents entry into pharmaceutical royalty asset class
- SFERS's approach: accessing through established GP rather than direct investing
Kern County Employees' Retirement Association (KCERA):
- Fund V commitment: $30M (Feb 2025)
- Smaller commitment reflects fund size relative to CalSTRS/TCDRS
- Entry-level allocation to build exposure and track record
These commitments demonstrate asset class accessibility for mid-sized pension plans ($10-30B AUM range) that cannot support direct investing programs like CPPIB or OMERS.
Healthcare Royalty Partners (Now KKR): Platform Transformation
KKR acquired majority control of HCRx in July 2025. CEO Clarke Futch retained a substantial minority stake and continues as Chairman/CEO—a structure that aligns management incentives with LP outcomes.
Track Record:
| Metric | Value |
|---|---|
| Capital deployed (SI) | $7+ billion |
| Transactions | 110+ |
| Products | 55+ |
| Therapeutic areas | 10+ |
| AUM (current) | ~$3B |
Fund Series:
| Fund | Year | Size | LP Composition | Growth |
|---|---|---|---|---|
| Fund I | 2007 | $200M | Early institutional | Baseline |
| Fund II | 2012 | $720M | 35% non-US | +260% |
| Fund III | 2014 | $1.5B | 50% non-US | +108% |
| Fund IV | 2020 | $1.83B | ~50% non-US | +22% |
Documented Pension LPs:
| Pension | Fund | Commitment | Year | Source |
|---|---|---|---|---|
| Florida SBA | Fund III | $65M | 2014 | Public filing |
| San Francisco CERS | Fund III | Undisclosed | 2014 | Public disclosure |
| Missouri LAGERS | Various | Undisclosed | Various | Public disclosure |
| Railway Pension Investments (UK) | Various | Undisclosed | Various | Public disclosure |
KKR Integration Implications for Pension LPs:
The KKR acquisition creates both opportunities and considerations for existing and prospective pension LPs:
- KKR ABF Partners II ($6.5B closed 2025) — Dan Pietrzak-led asset-based finance platform
- Global Atlantic — KKR's insurance platform seeking yield-matching assets
- Retail channels — Potential semi-liquid vehicle development
Per KKR's October 2025 corporate pension research, alternative fixed income strategies including specialty finance offer "differentiated sources of return, often with enhanced structural protections and reduced correlation to traditional markets."
Futch told BioXconomy in December 2025: "The market has been growing at a compound annual growth rate of over 20%, and we believe this growth can continue and accelerate. We're excited about the potential for the market to double or triple in the next 3-5 years."
UK Pension Allocations
Railpen: Growth Fund Diversification Through Alternative Risk Premia
Railpen (£34B total assets, ~350,000 members connected to the railway industry) made the largest documented single pension allocation to pharmaceutical royalties globally: approximately £800M (~$1B) in 2024, representing roughly 3% of the Growth Fund (£23B AUM).
Organizational Context:
The allocation sits within Railpen's Growth Fund, a multi-asset portfolio managed by Craig Heron, Director of Public Markets. The Growth Fund has 65% equity exposure, with the remaining 35% allocated across credit, alternatives, and diversifying strategies. Railpen has been building internal management capabilities since 2014, but recognizes that specialized strategies warrant external manager partnerships.
Per Heron: "Where we don't manage things internally is where it doesn't make sense... [Some strategies] would take us probably 50 people to do it properly, and our entire investment team is around 50 people."
Allocation Rationale:
Per Private Markets Profile interview with Heron:
| Dimension | Heron's Assessment |
|---|---|
| Strategic positioning | "Alongside other alternative, diversifying exposures such as natural catastrophe reinsurance and a trend-following strategy" |
| Return objective | "High single digit, or low double digit return over the long-term" |
| Diversification purpose | "Assets that will diversify our exposure to the equity risk premium" |
| Risk assessment | "If revenue growth disappoints then returns are also likely to disappoint" + "production and counterparty risk" |
| Access mechanism | Via external specialist manager assembling bespoke portfolio |
| Capacity for growth | "Some additional headroom for increased exposure" but "not markedly so" |
Portfolio Construction Philosophy:
Railpen's approach to external manager selection emphasizes "fit over performance" and a "holistic" perspective:
- Managers must evaluate mandates "in the context of the wider growth fund or the wider pooled fund, rather than a standalone mandate"
- Railpen maintains detailed dialogue with managers to ensure strategies complement the overall portfolio
- The fund operates through pooled fund structures serving 107 different sections to achieve economies of scale
Why Pharmaceutical Royalties?
Heron's characterization of healthcare royalties alongside nat-cat reinsurance and trend-following reveals the strategic intent: these are alternative risk premia strategies, not traditional asset classes. The common thread:
| Strategy | Risk Premium | Correlation Profile |
|---|---|---|
| Healthcare royalties | Drug revenue growth | Low correlation to equity/credit cycles |
| Nat-cat reinsurance | Hurricane/earthquake risk | Zero correlation to financial markets |
| Trend-following | Momentum risk premium | Negative correlation in crisis periods |
This positioning suggests pharmaceutical royalties serve as a diversified growth allocation rather than core income—consistent with the low double-digit return target rather than mid-single-digit fixed income yields.
Comparison to Other UK Allocators:
Railpen's £800M allocation (~3% of Growth Fund) significantly exceeds typical UK LGPS commitments ($50-100M range). This reflects:
- Larger asset base enabling institutional-scale allocation
- In-house investment team capable of manager selection and monitoring
- Growth Fund mandate permitting alternative strategies
- Willingness to build bespoke portfolios via external specialist managers
UK Local Government Pension Schemes: Early Adopters in Public Sector Pensions
Documented LGPS Commitments:
| Fund | Manager | Commitment | Stated Rationale |
|---|---|---|---|
| Cumbria Pension Fund | HCRx Funds | $75M aggregate | "High net return and diversification" |
| Strathclyde Pension | HCRx | Undisclosed | — |
| Scottish Borders | HCRx | Undisclosed | — |
| East Riding of Yorkshire | HCRx | Undisclosed | — |
| Westmoreland & Furness | HCRx | Undisclosed | — |
Estimated 12+ LGPS funds with healthcare royalty exposure as of 2025.
Cumbria Pension Fund Profile:
Cumbria's documented ~$75M aggregate commitment to HCRx funds is notable for an LGPS fund of modest size. Investment rationale cited "high net return and diversification"—consistent with the asset class positioning as an equity-like return generator with bond-like predictability. The fund has indicated it is "not increasing allocation," suggesting the position has reached target weight.
LGPS Pooling Dynamics:
Border to Coast (one of eight LGPS asset pools) is expanding from £65B to ~£110B by April 2026 as seven additional funds join. Pooling creates potential for:
- Larger centralized royalty allocation mandates exceeding individual fund capacity
- Professional manager selection and monitoring across member funds
- Access to GPs (OrbiMed, HCRx/KKR, Sagard) for funds previously below minimum commitment thresholds
The pooling dynamic may democratize pharmaceutical royalty access for smaller LGPS funds that cannot independently establish GP relationships or meet $30M+ minimum commitments.
Alternative Access Points for Pension Allocators
Beyond direct investing (Canadian model) and traditional fund LP commitments (U.S. model), pension funds can access pharmaceutical royalties through several alternative structures:
Evergreen Structures (Sagard Healthcare)
Sagard Healthcare operates an evergreen fund structure that eliminates traditional private fund friction:
| Benefit for Pensions | Traditional Fund | Evergreen |
|---|---|---|
| Re-up decisions | Every 3-4 years | Continuous |
| J-curve effect | Material | Minimal |
| Cash drag | Fund transitions | Continuous deployment |
| Governance | Multiple vintages | Single allocation |
Fund I closed at $725M (Feb 2021, exceeded $600M target) with sovereign wealth funds and pension funds as core LPs. Target net IRR: 15%+.
Managing Partner David MacNaughtan (ex-CPPIB IP strategy): "This is a great diversifier and a great completion strategy for a fixed income portfolio... fixed income-like characteristics with equity-like upside potential."
Public Market Vehicles (DRI Healthcare Trust)
DRI Healthcare (TSX: DHT.UN) provides publicly traded exposure with daily liquidity—attractive for pension portfolios requiring transparent NAV and no lock-up.
| Metric | Value |
|---|---|
| Market cap | ~C$634M |
| Royalty streams | 28 products |
| Adjusted EBITDA margin | 81% |
| Distribution yield | ~2.5% |
Pension Benefit: No commitment management, daily liquidity, UCITS-compatible access for European allocators. Trade-off: Lower returns than private funds due to public market discount to NAV (~0.8x).
BioPharma Credit (London-Listed)
Pharmakon Advisors manages BioPharma Credit PLC (London-listed) and has committed $10B across 62 transactions. The London-listed vehicle provides UCITS-compatible, sterling-denominated exposure for UK and European pension schemes seeking liquid pharmaceutical credit/royalty exposure.
January 2026 Market Activity
Recent transactions illustrate the deal flow pension allocators—whether direct investors or fund LPs—can expect:
Development-Stage Example: Royalty Pharma / Teva TEV-'408
Up to $500M funding agreement (Jan 11, 2026) for an anti-IL-15 antibody in Phase 2b development for vitiligo.
| Component | Amount | Pension Relevance |
|---|---|---|
| Phase 2b co-funding | $75M | Early-stage risk taking |
| Phase 3 option | $425M | Staged deployment reduces risk |
| Expected IRR | Teens | Higher return for pre-approval risk |
This structure exemplifies why pension funds accept development-stage royalties: staged deployment with options reduces downside while preserving upside participation.
Approved Product Example: Royalty Pharma / Evrysdi
$240M acquisition (Dec 29, 2025) of the remaining royalty on Roche's Evrysdi for SMA—a "land and expand" strategy on proven commercial assets that provides low double-digit IRRs with reduced underwriting risk.
Market Context: Growing Deployment Opportunities
| Year | Transaction Volume | Pension Implication |
|---|---|---|
| 2015-2019 avg | $2.7B | Limited capacity |
| 2020-2024 avg | $6.2B | Expanding access |
| 2025 | $10B | Record volume |
| 2028-2030E | $20-30B | Material deployment capacity |
Per HCRx/KKR CEO Clarke Futch: "The market has been growing at a compound annual growth rate of over 20%, and we believe this growth can continue and accelerate. We're excited about the potential for the market to double or triple in the next 3-5 years."
For pension allocators, this growth means expanded GP capacity, more fund options, and increased direct investing opportunities.
Why Now? The Case for Pension Allocation
Pension funds face a convergence of factors making pharmaceutical royalties increasingly attractive:
The Return Gap Problem
| Asset Class | Expected Return | What Pension Funds Get |
|---|---|---|
| IG Corporate Bonds | 5.5-6.0% | Below actuarial target |
| Private Credit | 9-11% | Approaching target, high correlation |
| Pharmaceutical Royalties | 12-16% | Above target, low correlation |
| PE Buyout | 13-17% | Above target, high correlation + leverage |
The 600-1000bps spread over investment-grade corporates compensates for illiquidity (7-10 year fund life) and complexity (specialized underwriting), while avoiding the leverage risk inherent in buyout PE.
Diversification That Actually Works
Many pension "alternatives" correlate highly with equities during downturns—exactly when diversification matters most. Pharmaceutical royalties are different:
| Correlation | Pharma Royalties | Direct Lending | PE Buyout |
|---|---|---|---|
| vs. S&P 500 | ~0.3 | ~0.5 | ~0.7 |
| vs. IG Credit | ~0.2 | ~0.6 | ~0.4 |
Why? Royalty cash flows are driven by prescription volumes—a function of disease prevalence, not GDP growth or credit spreads. As Railpen's Craig Heron noted, royalties sit alongside "natural catastrophe reinsurance and a trend-following strategy" as genuinely uncorrelated return streams.
Liability Matching Benefits
For maturing DB plans prioritizing cash flow matching:
| Characteristic | Pharmaceutical Royalties | Fixed Income | PE |
|---|---|---|---|
| Duration | Finite (5-10yr) | Varies | Perpetual |
| Cash flow predictability | High | Very high | Low |
| Inflation sensitivity | Moderate (drug pricing) | Low | Moderate |
| Reinvestment risk | Moderate (fund roll) | High | High |
| Regulatory risk | Moderate (IRA, etc.) | Low | Low |
The finite duration and predictable (if declining) cash flows match pension liability runoff profiles better than open-ended alternatives.
Early Mover Advantage: Limited Capacity
Total addressable pension capital in pharmaceutical royalties: ~$5.5B documented, representing <0.1% of global pension assets.
| GP | Fund Size | Est. Pension % | Pension Capital |
|---|---|---|---|
| OrbiMed | $1.86B | ~25% | ~$465M |
| HCRx (KKR) | ~$2B (est. V) | ~20% | ~$400M |
| Sagard | $725M+ | ~30% | ~$220M |
| DRI | Public | Minimal | — |
| Other/Direct | — | — | ~$3B (CPPIB, OMERS) |
The limited GP capacity relative to pension demand creates favorable terms for LPs who can access the asset class early. As the market scales (HCRx/KKR's "double or triple" thesis), early movers benefit from established GP relationships, demonstrated underwriting track record, and access to co-investment deal flow.
5. Governance and Fee Alignment
Pharmaceutical royalty fund structures typically offer favorable governance terms for pension LPs:
| Term | Typical Structure | Pension Benefit |
|---|---|---|
| Management fee | 1.25-1.75% on committed | Lower than PE buyout (2.0%) |
| Carried interest | 15-20% over hurdle | Standard alignment |
| Hurdle rate | 7-8% preferred | Meaningful protection |
| Co-investment rights | Pro-rata or better | Fee-free deployment |
| Advisory board seats | Available for major LPs | Direct oversight |
| Reporting | Quarterly NAV + position-level | Transparency |
The combination of lower fees than traditional PE, meaningful hurdles, and co-investment opportunities creates an attractive net-of-fee return profile for pension allocators.
Structural Barriers and Catalysts
Asian Pension Underweight
| Market | AUM | Royalty Exposure | Barrier |
|---|---|---|---|
| Korea NPS | $1T+ | Zero documented | Equity-oriented healthcare; GP relationship gaps |
| Japan GPIF | $1.7T | Zero documented | 1.6% alts vs 5% cap; Manager Registration System |
| Taiwan BLF | ~$200B | Zero documented | Explicit structured product exclusions |
| Australia Super | A$367B | Potential | Explicit "royalty" inclusion in private credit mandate |
NPS (Korea) Analysis:
Despite 20%+ 2025 returns (record third consecutive year), 55% equity target by 2030, 456 PE fund relationships, and expanding direct lending and secondaries, NPS maintains zero documented exposure to OrbiMed, HCRx/KKR, Sagard, or DRI despite these managers having $20B+ combined AUM.
Catalyst: GP outreach, track record visibility, and education on the asset class fundamentals. The December 2025 appointment of Kim Sung-joo (health policy specialist) as NPS President may accelerate healthcare-focused alternatives exploration.
Market Size Projections
Per Deloitte survey (September 2025):
| Metric | Survey Result |
|---|---|
| Would consider royalties for capital raising (next 3 years) | 87% |
| Interest in creating synthetic royalties | 80% |
| Would pursue royalties instead of/in addition to equity | 67% |
| Would pursue royalties instead of/in addition to traditional debt | 77% |
Market Size Trajectory:
| Year | Est. Annual Transaction Volume | Source |
|---|---|---|
| 2015-2019 | $2.7B average | RPRX Investor Day |
| 2020-2024 | $6.2B average | RPRX Investor Day |
| 2025 | $10B | RPRX JPM Jan 2026 |
| 2028-2030E | $20-30B | HCRx/KKR "double or triple" |
If HCRx's "double or triple in 3-5 years" projection materializes, the addressable market grows from $10B to $20-30B annually, creating substantial deployment capacity for pension allocators.
Summary: Documented Pension Positions
Direct Royalty Investments
| Pension | Asset | Amount | Year | Est. IRR |
|---|---|---|---|---|
| CPPIB | Keytruda | $1.3B | 2020 | Low double-digits |
| CPPIB | Venetoclax | Up to $325M | 2017 | Low double-digits |
| CPPIB | Attruby | $200M | 2024 | Teens |
| OMERS | Crysvita (cumulative) | ~$900M | 2022-2025 | Low double-digits |
| OMERS | ORLADEYO | $150M | 2021 | Mid-teens |
Fund LP Commitments
| Pension | Fund | Amount | Performance |
|---|---|---|---|
| CalSTRS | OrbiMed R&C IV | $75M | 14.1% net IRR |
| CalSTRS | OrbiMed R&C V | $75M | Early stage |
| TCDRS | OrbiMed R&C IV + V | $300M | — |
| SFERS | OrbiMed R&C V | $85M | Early stage |
| KCERA | OrbiMed R&C V | $30M | Early stage |
| Florida SBA | HCR Fund III | $65M | — |
| Railpen | Bespoke portfolio | £800M | — |
| Cumbria Pension | HCR Funds | $75M agg | — |
Total documented pension capital: ~$5.5B+
Concentration: Canadian pensions (CPPIB, OMERS) dominate direct investing; U.S. public funds favor fund LP positions; UK pensions (Railpen, LGPS) increasingly active. Asian pensions remain structurally underweight despite mid-teens IRRs, 90%+ development-stage success rates, and defensive risk characteristics.
Disclaimer: The author is not a lawyer or financial adviser. This content is for informational purposes only and does not constitute investment or legal advice. Readers should conduct their own due diligence and consult qualified professionals before making investment decisions.
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