PE ranks as strongest asset class for pensions over the past decade, survey says

Private equity has been the best performing asset class for American pension funds, according to the American Investment Council’s 2022 Public Pension Study.

According to the report, private equity delivered a 15 percent median annualized return over the past 10 years. During the same period, total funds returned 9 percent while public equity brought back 11.7 percent.

“I think the 10-year number was an impressive number, along with the expansion of funds increasing their allocation to private equity. Both of those were a very pleasant outcome,” said Drew Maloney, president of the American Investment Council.

The public pension systems with the best returns included Illinois State Board of Investment at 19.8 percent; West Virginia Investment Board at 19.6 percent; Massachusetts Pension Reserves Investment Trust at 18.8 percent; Public School & Education Employee Retirement System of Missouri at 18.4 percent and Iowa Public Employees’ Retirement System at 18.25 percent, the report said.

However, LPs face headwinds in the frenetic pace of fundraising, as well as broader economic shocks. In recent months, some public pension funds have announced they have reached or are nearing their commitment levels for the year.

One factor why has been “LP fatigue” brought on by years of frantic fundraising.

Another major contributor is rising private equity allocations, which increase as a percentage of the full fund when public stock holdings sink in the market turmoil – known as the denominator effect. Private equity valuations lag public markets by a quarter or more, so don’t move as quickly as public holdings.

“It remains to be seen by the end of the year just how much impact the denominator effect will have. It depends on where public markets are at. Also, many pension funds are allowed to stay within a certain allocation range. Depending on this, many may still be within the range and may not want to reallocate,” Maloney said.

The pension funds with the biggest investments in private equity include California Public Employees’ Retirement System at $44.8 billion; California State Teachers’ Retirement System at $36.9 billion; Washington State Investment Board at $36.4 billion; Teacher Retirement System of Texas at $34.7 billion and New York State Common Retirement Fund with $29.4 billion, according to the report.

The report said private equity makes up 11 percent of public pension fund portfolios. Nearly 90 percent of public pension funds in the study have some exposure to private equity.

“If you look back at 10 years ago, the allocations to private equity have roughly doubled over that time. LPs are also continuing to suggest that they will increase allocations to PE in pension plans,” Maloney said.

Private equity returns for endowments and foundations stood at 11.7 percent over the past 10 years, also outpacing all other asset classes, the report said.