Private Equity Powers Public Pension Portfolios
Chief Investment Officer
By Michael Katz
August 28, 2019
Private equity continues to be the top-performing asset class for public pension portfolios, according to research from the American Investment Council (AIC).
The AIC publishes an annual report that examines the returns of the largest public pension plans in the US, and for each of the past seven years, the report has found private equity to be the top-performing asset class for public pension funds. The study analyzed 165 US public pension funds that represent over 20 million public sector workers and retirees.
According to this year’s report, 91% of the public pensions in its sample had some exposure to private equity, and it made up 8.7% of public pension portfolios on a dollar-weighted basis. It also said that private equity provided annualized returns of 10.2% over a 10-year period in 2018. This compares to an 8.5% return for public equity, and a 4.8% return each for fixed income and real estate over the same period.
The public pension funds with the largest investments in private equity are the California Public Employees’ Retirement System with $27.19 billion, the Teacher Retirement System of Texas ($21.24 billion), the Washington State Investment Board ($20.92 billion), the California State Teachers’ Retirement System ($18.32 billion), and the New York State Common Retirement Fund ($17.50 billion).
And the public pension funds that had the highest private equity returns were the Massachusetts Pension Retirement Investment Trust, which had 10-year annualized returns of 13.63% as of June 30, 2018, followed by the Ohio School Employees Retirement System (13.30%), the Minnesota State Board of Investment (11.70%), the Los Angeles County Employees’ Retirement Association (11.40%), and the Public Safety Personnel Retirement System of the State of Arizona (11.36%).
“Private equity firms partner with public pension funds to buy companies, improve their performance, create jobs, and add long-term value,” wrote AIC CEO Drew Maloney in an op-ed that was published in The Detroit News. “The returns from these ventures go directly to the firm’s investors, most of whom are public pension funds. Local teachers, first responders, and dedicated public servants collect these returns in their pensions when they retire.”
An example of how much public pensions are relying on private equity could be seen in the 2018 returns for the Pennsylvania State Employees’ Retirement System(Penn SERS) portfolio. Although the fund reported a 4.6% loss for the year, private equity returned 11.4%, and was the only asset class besides cash to earn positive returns for the year.