Comment Letters

The GAO, Private Equity and Pension Fund Investments


In response to a recent study by the Government Accountability Office of pension fund investments in private equity and hedge funds, several members of Congress raised concerns about private equity as an asset class. A careful reading of the GAO report makes clear that these concerns, while understandable and reasonable, are not supported by the study itself.

Private equity has been a well-established and very successful investment for pension plans for nearly three decades. In fact, top-quartile PE funds over the past 25 years have delivered average annual returns of 39 percent, significantly higher than returns posted by publicly-traded stocks.

That said, we agree with the GAO and the Members of Congress that every pension fund manager should be fully aware of the risks and opportunities inherent in every type of potential investment, including publicly-traded equities, debt instruments and so-called alternative investments.

No pension fund manager should rely too heavily on any given asset class. The private equity industry stands willing and ready to work with Congress and the Department of Labor to better educate pension fund managers, particularly those who manage smaller funds, on how to make prudent, responsible investments in private equity funds.

Following are specific responses to some of the concerns raised following release of the GAO Report:

Concern: Private equity investment is a new and untested strategy for pension funds.


The GAO itself reports that, “Unlike hedge funds, pension plan investment in private equity is not a recent phenomenon.” It adds that pension funds have been investing in private equity since ERISA’s “prudent man” standard was clarified in 1979.

“The majority of plans included in our review began investing in private equity more than five years before the economic downturn of 2000 to 2001, and some of these plans have been investing in private equity for 20 years or more.”

In short, PE is not untested or unproven. It doesn’t mean that private equity investments are without risk or that they are right for every fund, but their track record is well-established.

Suggestion: Private equity and hedge fund investments are similar in most respects and should be viewed identically.


The GAO reports that, “Due to the longer history of pension investment in private equity, it is generally regarded as a more well-established and proven asset class compared to other alternative investments, such as hedge funds.” The report adds: “Representatives of some plans told us that private equity has been their best performing asset class over time.”

The GAO also states: “While market conditions have some effect on the performance of a private equity fund, the effect may be mitigated by the ability of the fund managers to enhance sound business plans and thereby add value to the underlying companies.”

Concern: Pension fund managers’ interest in maximizing returns competes with the interests of pension beneficiaries.


Plan sponsors are legally required to manage pension funds to ensure they have assets sufficient to meet the needs of beneficiaries. There is no inherent conflict.

Funds invest a small portion of their assets in PE precisely because they help meet them meet their obligation to beneficiaries. Achieving returns over 25 years that are triple those of the S&P index is completely consistent with the interests of retirees.

Criticism: Pension fund investments in hedge funds and private equity have been rising at disturbing rates.


The GAO report finds that the percentage of pension plans investing in private equity has increased by a modest 9 percentage points since 2001, while investment in hedge funds has increased by 36 percentage points over the same period.

Concern: Pension fund investment in private equity amounts to excessive risk-taking and inappropriate speculation on the part of pension fund managers.


Pension fund sponsors face several kinds of risk. One is that they will be too conservative in their investments and not generate returns sufficient to meet their plans’ obligations. Another risk is that their investments become concentrated in a narrow range of assets or become too highly correlated to the performance of the overall economy.

The current dislocation in the financial markets is a powerful reminder of the benefits pension plans derive from investing a portion of their resources in private equity.

Unlike investments in speculative credit markets, arbitrage strategies, or a narrow range of industries, a private equity fund’s investments in turn-around companies limit the potential losses of its partnerships, their investors, including financial institutions, and lenders.

While companies held by private equity funds can fail, the portfolios of the funds are diversified across industries, so that a crisis in one sector such as housing does not threaten to force the liquidation of substantial numbers of other assets.

Unlike hedge funds, private equity funds make long-term investments (five years, on average) and as a result are much less likely to experience the type of volatility that has caused some to express concern about alternative investments by pension funds.

“While market conditions have some effect on the performance of a private equity fund,” GAO explains, “the effect may be mitigated by the ability of the fund managers to enact sound business plans and thereby add value to the underlying companies.”