ICYMI: Klinsky Op-Ed in Cincinnati Enquirer – “Private Equity Investments Paying Off for Public Pensions”
Firefighters, school teachers, police officers and other public employees shouldn’t have to worry about their long-term retirement security. Happily, a new study shows that pension fund investment in private equity has been the best-performing investment class for public pension funds for the past 10 years, and is helping to ensure retirement security. This is especially true here in Ohio. The Ohio School Employees Retirement System recorded 13.1 percent annualized returns over the past 10 years on its private equity investments, making it the second-best pension out of the 163 included in the study.
If you’re a public-sector worker in America, chances are that your pension fund is utilizing private equity investments to build the assets needed to pay for your retirement. The American Investment Council’s newly released 2018 Public Pension Study tracks 163 public pensions, and found that 93 percent of them partnered wit private equity firms in order to generate high returns by owning and building businesses.
As the study makes clear, private equity returns for public pension plans have averaged 8.6 percent per year over the past 10-year period after all fees and expenses, as compared to much lower returns from public equity (6.1 percent), fixed income (5.3 percent), and real estate (4.7 percent).
Top performing private equity funds have delivered returns that are more than twice the median public equity return for the decade now ended. Even the lowest 25th percent of private equity returns exceeded the highest 75th percent of returns from these other types of investments.
Despite these outstanding returns, however, and despite billions of tax dollars paid by private equity firms, many people still do not understand what “private equity” does.
Private equity firms are not hedge funds. They do not buy and sell shares of stock on Wall Street. Rather, private equity firms own and operate entire businesses for many years, set the business’ strategy, set the team and are responsible for long-term performance.
There are now over 4,700 private equity firms all over America, owning and building approximately over 30,000 private companies. Increasingly, the best operating managers in America are joining these firms, where they can focus on building companies over a five- to ten-year period, rather than worrying about quarterly earnings reports the way a publicly traded company must do.
When pension plans invest in private equity firms, the pension plan – in essence – becomes a shareholder of the companies that their handpicked private equity managers buy and build. Generally, the private companies begin much smaller than the giant businesses that trade on the public stock exchanges, and so there are often more ways for skilled managers to add value and growth. The pension plans’ gains on their private equity ownership are used to build the pension fund asset base, and to provide the capital needed to pay pensions as workers retire.
For example, pension funds became owners of the Dunkin Donuts company beginning in 2005, when that company was much smaller than it is today and when three private equity firms (Bain, Carlyle, and TH Lee Partners) teamed up to buy and build it. For the next seven years, managers and investors from these private equity firms transformed Dunkin’s management team, instilled a service-oriented culture, and overhauled the menu to offer healthier options. By the end of the seven years under private equity management, Dunkin Donuts had added almost 5,000 locations (creating multiple new jobs at each location) and the investors – including public pension funds – made over three times on their investment.
Year after year, private equity firms regularly deliver positive benefits to pension plans and investors, workers, customers and communities. Whether you’re a kindergarten teacher in Cincinnati, a firefighter in Houston, or a police officer in San Francisco, you deserve to be paid your pension. Private equity has been a winning investment for you, and is working to build thousands of companies and create new jobs all around you.
Steve Klinsky is the chairman of the American Investment Council, and the founder and CEO of New Mountain Capital, LLC.