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US-Based Public Pension Funds vs. Private Pension Funds – October 2014

by Brian Orlay

  • 29 Oct 2014
  • PE

Private equity remains a popular asset class among investors; according to the Preqin Investor Outlook: Alternative Assets H2 2014, 86% of investors surveyed by Preqin stated that their private equity commitments have met or exceeded their expectations in the past 12 months. There are a wide variety of institutional investors that allocate to private equity, among them, public and private pension funds are some of the most prominent. Public and private pension funds combined make up approximately 24% of all private equity investors worldwide, according to Preqin’s Investor Intelligence online service. US-based pension funds account for a significant portion of those investors, accounting for 55% of all pension funds that invest in private equity worldwide. 

While there are more US-based private pension funds investing in private equity than there are public pension funds, 416 and 298 respectively, public pension funds typically allocate on average 8.6% to private equity, over one percent more than private pension funds, at 7.3%. Public pension funds are generally also much larger, with aggregate assets under management of $3.6tn, while private pension funds have an aggregate $2.4tn in assets under management. 

With regard to fund type preferences, US-based public and private pension funds share many more similarities than differences. The most popular fund type for both is fund of funds; 74% of public pensions and 69% private pensions have a preference for or have had previous exposure to funds of funds. They are popular because they offer increased exposure to a variety of funds, at reduced risk to the investor. It is also unsurprising to find buyout funds, one of the most common private equity investments, among the most popular funds invested in by pension funds, with 60% of both private and public pension funds allocating to the fund type. However, US-based public pension plans are more likely to invest in natural resources (39%), timber (26%) and mezzanine funds (48%) than their private counterparts, which target these fund types at 22%, 11%, and 33%, respectively.

US-based public pension funds are much more likely to view themselves as global private equity investors, as well as having a greater preference for both Asia (54%) and emerging markets (45%), as opposed to 39% and 30% of US-based private pension funds respectively. Comparable amounts of public and private pension funds invest in both North America (89%, 91%) and Europe (61%, 59%). 

Going forward, it does not appear that US-based pension funds will be slowing down when it comes to investing in private equity funds. Employees’ Retirement System of Texas (ERS) will be looking to commit $950mn across six to 10 funds with existing managers in 2015. Also, Boeing Company Pension Fund has recently committed to PAI Europe VI, the sixth buyout fund in a series raised by PAI Partners. This shows that private equity will be an ongoing part of pension funds’ alternative asset portfolios for the foreseeable future.

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