PEGCC Response to NYT Article on Alternative Investments

Julie Creswell’s Monday NYT piece lumps together the performance of a number of industries to make the case that “alternative investments” don’t deliver superior investment returns to public pension funds. But looking broadly at alternatives without drilling down to its component parts masks a critical point – not all investments are created equal.

Data released publicly by many state pension funds shows clearly that private equity is the exception – it consistently outperforms other investments and delivers returns that far exceed those of traditional asset classes like public equities or fixed income.

The Pennsylvania State Employee’s Retirement System (PA SERS) – cited by Ms. Creswell as a public pension fund whose alternative investment returns are missing the mark – is a prime example. According to PA SERS’ public filings, their private equity investments returned 11.7 percent in 2011 – well above the fund’s overall return of 3.6 percent. The pension fund also reports a 12.3 percent annualized return generated by private equity between 2006 and 2010.  In fact, without private equity, it’s safe to say that PA SERS’ overall performance would be lower than 3.6 percent.

Looking more broadly, Cambridge Associates reports that private equity delivered an 8 percent five-year annualized return over the last five years.  Over that same time period, other asset classes lagged behind. Take public equities: the S&P 500 5-year annualized return is -1.18 percent and NASDAQ’s is 1.35 percent.  Over a similar period, the annualized Barclay Capital Credit Bond Index returned 6.52 percent and the Hedge Fund Replication Index, which measures aggregate hedge fund performance, returned 2.84 percent.  Finally, real estate has lost over 5 percent annualized over a five-year time horizon.

The simple point is this: private equity has a proven track record of delivering superior investment returns to public pension funds, bolstering the financial security of millions of working and retired Americans.  This fact is why public pension funds and other investors are increasing their allocations to private equity.

But don’t take our word for it. Listen to Joe Dear, the CEO of the nation’s largest public pension fund CalPERS, who was quoted by Ms. Creswell. He said it best when talking about private equity: ”Over the longer term, that kind of outperformance represents real skill, not luck, and it’s worth paying for.”