January 31, 2013

Increasing Stakes in Private Equity

Pension funds have invested billions of dollars in private equity since the early 1980s. Since then, they have steadily increased portfolio allocations to private equity – doubling in the last decade alone.

The latest Issue Brief from the National Institute on Retirement Security (NIRS), titled “How Do Public Pensions Invest?” illustrates the growing commitment of public pension funds to private equity. Using data from Wilshire Consulting, NIRS shows that the percentage of assets allocated to private equity by state pensions rose from 3.9% in 2001 to 8.2% in 2011. The report notes that after the 2007-2008 financial crisis, larger pension funds reduced their exposure to public equities while increasing their exposure to alternative assets, such as private equity. Echoing these findings, The Wall Street Journal recently reported that larger public pensions with assets of $5 billion and greater allocated 12.7% of their portfolios to private equity in 2012.

What makes private equity so attractive to pension funds? One reason is superior investment returns – 8.8% annually over the last 10-years, compared to 3.7% for public equity. Another reason could be that larger commitments receive better returns. Using information from corporate and public pensions’ defined benefit plans, a recent academic study found that scale influences private equity returns. The researchers find that larger commitments to private equity produced relatively higher returns, driven by cost savings and better access to investment information.

Pension investment in private equity means greater retirement security for millions of Americans while strengthening and growing companies in all 50 states.