US-based private sector pension funds constitute a significant proportion of the total number of investors in private equity, making up 15% of all US-based active investors. Preqin’s Investor Intelligence currently tracks 428 US-based private sector pension funds. This figure has remained relatively stable, increasing by 2.6% from 2014 and 1.5% between 2013 and 2014, showing that private equity, which provides pension funds with the long-term capital appreciation required, continues to be an attractive investment option for private sector pension funds.
The chart below shows the average US-based private sector pension fund’s private equity allocation as a proportion of total assets. The average allocation to private equity reached a high of 7.4% in 2013. Since then, it has declined to 6.5% of total assets as of May 2015. However, Preqin data shows that the aggregate total assets under management of US-based private sector pension funds in private equity have risen year-on-year, from $1.7tn in 2010 to $2.8tn in May 2015. The total amount of capital allocated to private equity by these investors shows the same positive trend, increasing from $74bn in 2010 to $124bn in 2015.
Though US-based private sector pension funds are allocating smaller proportions of their investment portfolio to private equity, they are still employing more capital in the asset class. In the past 12 months, this group of investors sought to commit to an average of six new private equity funds throughout the year, which potentially indicates the significant number of fund managers that can rely on private pension funds for commitments when taking a fund to market. Looking at the fund preferences of these US-based private sector pension funds, 58% have indicated that buyout funds are an area of future preference, with venture capital (54%) and distressed debt (37%) also ranking highly as possible investment strategies.
Private sector pension funds find private equity investments attractive as long-term investments due to their reputation for outperformance. As they seek to finance employee benefits, pension funds must consider diverse methods of putting their pools of capital to work, and it seems US-based private pension funds will remain active investors for the foreseeable future.