An Analysis of US-Based Public Pension Fund Allocations to Private Equity – June 2015

by Angela Sormani

  • 11 Jun 2015
  • PE

Public pension funds are the single largest institutional investor in private equity funds in terms of the proportion of capital committed, and are therefore vital players in the private equity LP universe. There are currently 293 US-based public pension funds actively committing to private equity, with a total of $3.7tn in assets under management (AUM), according to Preqin’s Investor Intelligence. These pension funds are allocating an aggregate of approximately $320bn of their total funds under management to the asset class, with an average allocation of 7% of AUM.

Unsurprisingly, the $307bn California Public Employees' Retirement System (CalPERS) has the largest current allocation to private equity, by value, of all US-based public pension funds investing in the asset class. This is despite the recent news that the pension fund will be looking to significantly reduce the number of commitments it makes, cutting ties with a number of fund managers. CalPERS’ current allocation stands at 10.1% ($31bn), slightly over its 10% target.

The public pension fund with the largest current allocation to private equity as a percentage of total assets is the $315mn San Antonio Fire and Police Retiree Health Care Fund, which has a 27% allocation, significantly above its target of only 15%. Conversely, in terms of target allocation percentage relative to AUM, it is the $817mn Austin Fire Fighters Relief & Retirement Fund that comes out on top, aiming to commit 25%, yet with a current allocation of only 15.1%.

Over three-quarters of US-based public pension funds (76%) have a preference for, or have previously invested in, fund of funds vehicles – the most of any private equity fund strategy. Notably, 62% have indicated an interest in venture capital funds, possibly because this high-risk asset class provides necessary diversification for an LP’s portfolio, as well as the potential of returning a large windfall. Other prominent strategies include buyout (61%), secondaries funds (55%) and distressed debt (47%).

When considering regional preferences, the vast majority (91%) of US-based public pension funds are expectedly active in North America. Almost two-thirds of these investors (63%) have a preference for Europe-focused vehicles and a healthy 59% are interested in Asia- and Rest of World-based opportunities, emphasizing the importance of this investor pool on a global scale.

US-based public pension funds continue to commit a significant amount of capital to the private equity asset class and this is likely to continue into 2015, with 152 of the 293 public pension funds in Preqin’s database currently under-allocated. With over 2,000 private equity funds currently raising capital, this group of investors is not short of investment opportunities and will likely continue to be a vital source of capital for these vehicles.

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