Public Pension Funds and Private Equity in 2012

by Louise Weller

  • 11 Dec 2012
  • PE

Over the course of 2012, public pension funds have continued to make significant commitments to the private equity asset class in order to maintain a diversified investment portfolio, as well as to achieve returns above the public markets given the continued volatility in the global economy. Public pension funds are faced with the need to achieve their annual benchmark return for their investment portfolio in order to meet their obligations; with falling returns on the stock market coupled with historically low interest rates, the private equity asset class is ever more appealing.

At the beginning of 2012, public pension funds maintained an average current allocation to private equity of 5.6% of total assets and an average target allocation of 6.7%. These average allocations have now increased to 6.3% and 7.1% respectively. One public pension fund that changed its allocation to private equity is Los Angeles County Employees' Retirement Association (LACERA), which has increased its target allocation from 9% of total assets to 11%. More recently, Kansas Public Employees’ Retirement System (KPERS) increased its target allocation to the asset class from 5% to 8% of total assets.  

Furthermore, despite still being below their target allocations to the asset class, public pension funds have increased the pace of new private equity commitments over the course of the year and are now closer to their target allocations compared to 12 months ago. Washington State Investment Board (WSIB) is an example of one public pension fund that has made a number of sizeable commitments to private equity funds in 2012. It committed $400mn to Advent Global Private Equity VII, which went on to hold a final close on €8.5bn and is the largest buyout fund known to have closed during 2012 so far. WSIB also committed $400mn to Oaktree Opportunities Fund IX, a distressed debt fund which held a final close on $5bn and a further $400mn to First Reserve Fund XIII, which has a target size of $6bn.

Despite many public pension funds making significant commitments to the asset class recently, it is important to recognize that many are still looking to decrease the number of GP relationships maintained within their portfolio. Pennsylvania State Employees’ Retirement System (PA SERS) announced earlier this year that it plans to decrease the number of GPs within its portfolio from 149 to between 60 and 90 over the next 5 years, reducing this number further over the next 10 years to between 40 and 50. However, PA SERS expects to make larger commitments to funds raised by the top performing fund managers within its portfolio. Therefore, with public pension funds looking to terminate relationships with fund managers that have not performed as expected, there is likely to be increased competition among GPs to secure LP capital over the next year.

It is clear that over the past 12 months public pension funds have committed a significant amount of capital to the asset class and this is likely to continue into 2013 and beyond. This investor group has increased both its average current and target allocation to private equity as financial instability has continued. However, it is important to recognize that although public pension funds may now be allocating more capital to the asset class and making significant commitments to funds, many will be more selective with fund managers and are likely to only to commit capital to the top performing funds managers that are able to stand out from the crowd and form a close relationship with.

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