Private equity has become an increasingly important aspect of pension fund investment portfolios over the past 10 years, with institutions being attracted by the opportunity to enhance the diversity of their private equity investments, and by the potential for significant returns over a sustained period of time. With aggregate assets of more than $9 trillion, and an average allocation to private equity of approximately 5% of assets under management, these investors offer a considerable source of capital for private equity fund managers.
The returns generated by pension plans’ private equity investments consistently exceed those generated by overall investment portfolios. The median one-year performance for pension funds reporting data as of March, for example, stood at -14.25% for private equity and -26.15% for overall investment portfolios.
City of Zurich Pension Fund, whose overall portfolio performance stood at -18.3% over the course of 2008, is an example of an investor whose private equity portfolio performance, which was -6.7% for the same period, was markedly superior to that of its overall portfolio. The CHF 14.5 billion pension fund intends to preserve its private equity commitment pace and diversification strategy which has seen it commit approximately CHF 200 million across 5-10 funds on an annual basis to construct a portfolio comprising stakes in buyout, venture capital, mezzanine and fund of funds vehicles.
Reaffirming the long-term nature of private equity, pension funds reported five-year median returns of 12.7% and overall portfolio returns of 0.78% in March this year. Ohio Public Employees’ Retirement System is an example of a public pension fund that seeks to commit capital to private equity as part of a sustained investment strategy.
The $57 billion system plans to make commitments totalling approximately $1 billion across 11-17 funds this year, with a similar level of activity anticipated during each of the next couple of years. While the bulk of this is expected to be invested in US buyout funds (typically committing $40-200 million), the system is also seeking venture capital, special situations and fund of funds opportunities, and will consider investing up to $460 million in international vehicles.
For more information on pension funds and their private equity investment portfolios, please see Investor Intelligence.