PE generates highest returns for public-pension funds: study

  • Returned 8.6 pct in 2017
  • PE has exceeded targets over the past 10 years
  • MassPRIM tops list of returns; CalPERS largest dollar allocation

Private equity was the top performing asset class for public-pension funds, returning 8.6 percent on 10-year median annualized returns in 2017.

That’s the upshot of an American Investment Council study released May 24. The study examined the data of 163 U.S. public-pension funds from Sept. 30, 2016, to Nov. 30, 2017, with most dates as of June 30, 2017.

“Only private equity has exceeded the average actuarial target return of 7.5 percent for pension plans over the last 10 years,” Bronwyn Bailey, vice president of research and investor relations at AIC, said.

Public-pension funds’ appetite for PE has been on the rise, Bailey said.

Ninety-three percent of the pension funds in the U.S. had private equity allocations in 2017 and invested a median of 8.6 percent of their portfolios in the asset class, the study found.

That’s up from 88 percent of 155 U.S. public pension funds that had PE allocations in 2015, AIC’s public pension fund analysis in 2016 found.

“We view not investing in private equity as a missed opportunity for pension funds, both in terms of their returns and portfolio diversification,” Bailey said.

Almost 45 percent of the public-pension funds had a PE allocation of 5 percent to 10 percent and 18.4 percent had PE allocations of 10 percent to 15 percent. Six percent had 15 percent to 30 percent PE allocation, and 24 percent had zero to 5 percent, the study found.

Massachusetts Pension Reserves Investment Trust generated the highest private equity returns, at 13.37 percent. It was followed by Ohio School Employees Retirement System at 13.1 percent and Utah Retirement Systems at 12.05 percent.

California Public Employees’ Retirement System led all public-pension funds with $26 billion in its PE portfolio, the study found.

The other public-pension funds with more than $10 billion in private equity allocations are Washington State Investment BoardTeacher Retirement System of TexasCalifornia State Teachers’ Retirement SystemNew York State Common Retirement Fund, Oregon Public Employees Retirement Fund and New York City Public Pension Funds.

PE yielded a median 11.4 percent for 2015, AIC’s 2016 analysis found. That year as well, private equity outpaced public equity’s 7.6 percent, real estate’s 6.3 percent, and fixed income’s 5.2 percent returns.

AIC did not release a report for public-pension funds’ private equity performance for 2016.

TRS of Texas topped the 2015 list returning 15.4 percent for its PE portfolio