Private Equity Appetite: Public vs. Private Pension Plans

More US private pension plans invested in private equity than their public counterparts in 2014, but their allocations were generally smaller, according to Preqin.

The data firm’s survey revealed 416 corporate pension funds invested in the asset class this year, compared to 298 public funds. Allocation size was the opposite, however, with public funds trumping private by more than 1%.

US public and private pensions made up approximately 24% of the world’s private equity investors and 55% of all pension funds allocated to the asset class.

The two types of pension plans shared an appetite for funds of funds, the survey found. Almost three-quarters of public funds and 69% of corporates said they preferred the fund type or have had previous exposure.

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“They are popular because they offer increased exposure to a variety of funds, at reduced risk to the investor,” Preqin said.

preqin private equity pensions Buyout funds were also popular among both public and corporate funds, with 60% of each already allocated to the fund. Public pension plans were more partial to investing in natural resources, timber, and mezzanine funds than private plans.

Preqin also found public pension plans had a more global investor mindset in investing private equity. More than half of public funds said they invested in Asian private equity and 45% in emerging markets, compared to 39% and 30% of corporate plans.

A separate survey by Preqin in October showed 86% of surveyed investors stated their commitments in the asset class have met or exceeded their expectations in the past 12 months.

The final quarter of 2014 is expected to see significant activity in private equity, supported by strong fundraising and record levels of dry powder.

According to its data, a record 2,205 funds—with an aggregate target of $774 billion—are seeking capital from investors, indicating heightened movement closing the year and into 2015.

“The third quarter of the year is typically a quieter one for the industry, and with several mega funds currently in the market, fundraising is likely to pick up again towards the end of the year,” said Christopher Elvin, head of private equity products at Preqin.

Elvin added private equity funds are sitting on a record $1.2 trillion of cash waiting to be deployed.

The California Public Employees’ Retirement System (CalPERS) has won its battle to protect members’ benefits in the bankrupt city of Stockton.

A bankruptcy judge in California yesterday reversed an earlier decision that would have left public employees of the city of Stockton facing pension cuts of up to 60%.

“This plan, I’m persuaded, is the best that could be done in terms of restructuring the city’s debts,” said Federal Benkruptcy Judge Christopher Klein, quoted by Bloomberg. He was speaking following final approval of a plan to bring Stockton out of bankruptcy and settle with creditors.

“The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future.”—Anne Stausboll, CalPERS CEOKlein had initially ruled that CalPERS as a creditor of Stockton did not deserve special protection, meaning the city could walk away from its contributions to the pension system.

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CalPERS CEO Anne Stausboll welcomed the new ruling, calling it “a smart decision”.

“The judge recognized that the city’s employees and retirees have already made significant concessions with respect to their pension and health benefits and that further impairing pensions would harm them even more,” Stausboll said.

“The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future. We will continue to champion the integrity and soundness of public pensions—to protect the benefits that were promised to the active and retired public employees who participate in the CalPERS pension plan.”

Under the ruling, fund manager Franklin Templeton stands to incur significant losses on unsecured debt it holds. Bloomberg reported that two funds would get back just 1% of $36 million, on top of a $4 million secured claim.

“We are obviously disappointed by your ruling and we will evaluate our options,” James Johnston, a lawyer for Franklin Templeton, told the judge yesterday.

CalPERS has been a vocal opponent to bankruptcy judges who have sought to align the $300 billion pension with other creditors. Following Klein’s initial ruling earlier this month the pension issued a statement calling the decision to enforce pension cuts “not legally binding”. CalPERS had submitted unsecured claims to $147.5 million of city assets.

The ruling comes as another US city—Detroit, Michigan—prepares for a final ruling on its plans to exit bankruptcy. CalPERS, while not a creditor in this case, has claimed that federal courts do not have the power to impose a proposal to let the city impair workers’ pensions.

In June, CalPERS successfully negotiated with the city of San Bernardino to settle a claim over $16.5 million of deferred debt payments.