Private equity continues to generate the most growth for allocators, according to a study by the American Investment Council, a trade association for private assets, even though their performance in the last couple of years has lagged amid languishing dealmaking and higher interest rates.
The study shows not just that “private equity delivers the best returns, but that it brings diversification” as well, comments Drew Maloney, the AIC’s CEO and president, in an interview. Plus, “it gives us access to growth companies.”
For the 10-year period ending in 2023, pension funds found that PE delivered the best performance, an annual 15.2%. Second place was public stocks, at 10.2%, then real estate at 9.6% and fixed income at 2.1%. Total fund return from PE averaged 7.9%. “Even the bottom 25th percentile of private equity returns exceeds the media public equity return,” the report said.
The study reported that 88% of public funds had PE exposure, representing 14% of the portfolio in dollar terms. PE is the third biggest allocation among public funds. The largest allocation was to public equity at 42%, with 21% to fixed income.
The favorable findings for PE are echoed elsewhere: A study by the Chartered Alternative Investment Analyst Association found that public pension funds’ PE investments, often to M&A and initial public offerings, outpaced other investment types for the long term on average and continued to do that in 2023. Ernst & Young projects that mergers and acquisitions deals will climb by 24% this year, and law firm White & Case expects much the same for IPOs, which it said advanced 24% in 2024’s first two months. Expected lower rates are a factor in the optimism.
The California Public Employees’ Retirement System, for instance, is among the many fans of PE. The fund announced in March that it would boost its target allocation to private equity and other private assets to 40% from 33% and that PE is its top returning investment. CalPERS, as of January 31, held $68.7 billion in private equity assets, 14.2% of its portfolio. It is the largest PE investor among public funds, followed by the California State Teachers’ Retirement System and the Washington State Investment Board (see chart).
The best returning pension fund PE portfolio, over 10 years, was that of the Vermont Pension Investment Commission, at 20.5%, followed by the Illinois State Board of Investment and the New York City Board of Education Retirement System, both at 18.8% (the Illinois system is slightly ahead by 0.02 percentage points).
PE overall enjoys a good reputation in the investing world. As AIC’s Maloney points out, PE investments tend mostly to benefit smaller companies, which “boost the economy and need the capital.”
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Tags: American Investment Council, CalPERS, Drew Maloney, Ernst & Young, Pensions, Private Equity, Public Equity, Vermont Pension Investment Commission, White & Case