Private Equity Continues as Top Performer for Pension Plans, Study Says

PE delivered 15.3% annually over 10 years, according to the American Investment Council. 



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.

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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.

Top 10 Public Pension Funds' Investments in Private Equity

In billions of dollars. As of June 30, 2023.

California Public Employees Retirement System
$60.15
California State Teachers Retirement System
$48.95
Washington State Investment Board
$44.90
New York State Common Retirement Fund
$36.98
Teacher Retirement System of Texas
$33.00
Oregon Public Employees Retirement System
$26.19
New York City Public Pension Funds
$24.44
Virginia Retirement System
$19.10
Florida Retirement System
$17.49
Massachusetts Pension Reserve Investment
$16.76
Source: American Investment Council

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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Can Investors Both Earn Returns and End Cancer?

Billions are pouring into cancer treatments around the world, so investors and funders discuss how institutional investors can access returns.

Global spending on cancer drugs totaled nearly $200 billion in 2022; by some estimates, this number could double by 2027. Oncology practices have received more than $44 billion in private equity financing annually since 2020, a higher number than any biotech or health science field.  

With billions pouring into cancer treatments, how can investors participate in the fight to cure the disease and earn alpha for their portfolios? 

The topic was discussed at a CIO webinar on Thursday. Speakers included Ross Barrett, managing general partner at Cancer Focus Fund; Marc Hurlbert, CEO at the Melanoma Research Alliance; and Amaka Uzoh, investment manager at the Memorial Sloan Kettering Cancer Center. The panel was moderated by Amy Resnick, executive editor of CIO.  

The webinar can be viewed on demand here. 

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Collaboration is Key  

This will one day be viewed as a golden age of progress for cancer therapies, said Barrett, who pointed to the numerous recent oncology treatments and innovations in cell therapies. Part of the VC investing arm of the Cancer Focus Fund, which partners with the MD Anderson Cancer Center, Barrett collaborated deeply with the center’s researchers on screening potential oncology investments.  

“We put the science on the front end, to be blindly scored by our scientific advisory board,” Barrett said of the fund’s due diligence process. Barrett then continued the market and product analysis of the due diligence process, but only once prospective investments are vetted through a scoring process reviewed by 15 key opinion leaders. 

VCs should be closely collaborating with research labs, said Uzoh, a perspective gained from an academic research institution. “We do see VCs do want to get as close as possible to the researchers and take on that risk.” 

Collaboration is key, according to Barrett: “With the exponential increase in progress on cancer therapies, we have to collaborate amongst academic research centers, with small biotech and with big pharma; it’s an all-hands-on deck effort.” 

The COVID-19 pandemic has really reshaped the biotech industry, the panelists said. The pandemic brought a lot of capital to biotechnology and made the industry much more collaborative, Uzoh said: “COVID has really made biotech a global endeavor, has made commercialization a global endeavor, and those are things we want to invest behind.” 

The Landscape for Investing in Cancer Research 

A global lens is key when screening potential investments in cancer research, said Hurlbert; the Melanoma Research Alliance funds research across 20 countries. The Cancer Focus Fund’s first fund has made investments across the world: Of 10 investments made, only four are based in the U.S. 

Memorial Sloan Kettering is comfortable taking on the risks of investing in biotech. The investment office of the research center has been investing in biotech since the 80s. “We’ve been very comfortable with risk for a long time, and that has really parlayed to us being comfortable taking on the risks associated with biotech,” Uzoh said.  

There was a time when the investment office at MSK thought it might be better not to lean so heavily on biotech investing, according to Uzoh, but the institution’s market perspective has changed. Before COVID, MSK saw the world entering a more volatile, lower-growth period. “We need to be in the pockets of high growth,” said Uzoh, who noted that biotech is a persistent pocket of growth.  

Despite the large number of cancer drugs approved and a large number going through the Food and Drug Administration approval process, there is still a large unmet need, according to Hurlbert. However, he notes that the pace of science and drug development is phenomenal: In melanoma treatment, 17 new drugs have been approved since 2014.  

“Clinicians can’t keep up with the pace of what’s [in] the treatment guidelines,” Hurlbert said. “There [are] so many new treatment options, and it is exciting, but there is still more work to do.” 

The Melanoma Research Alliance issues grants totaling $10 million to $12 million per year across about 40 projects, with most having a multi-year duration, Hurlbert said. At any given time, about 115 live projects are actively receiving grants from the institution.  

He also noted that in the last few years, scientists have been discovering new ways to treat historically undruggable parts of cancer cells. But Hurlbert said for investors to benefit, they have to get in early: “You really do need to get in early, and at the lab level, you can no longer wait until the Phase 2 clinical trial to start investing.” 

Uzoh noted that biotech companies are hungry for cash. Unlike many private tech companies, which recently have preferred to stay private, biotech companies increasingly need to go public for liquidity, engaging in IPOs after a Series B or A funding round. Driving the need for cash, the biggest cost for biotech startups is labor. “There are only so many people who have Ph.D.s and master’s degrees, and that is the highest expense,” Uzoh said.  

Some of those labor costs and other costs may be outsourced to countries with lower labor costs through contract research organizations, according to panelists, but there is one line item that is continuing to increase: computing. Artificial intelligence and machine learning have become a major productivity boost to drug discovery. 

“On one hand, because data is getting cheaper to store, because the models are getting more interesting, that is actually powering our ability to go after targets that we [were] seeing as undruggable,” Uzoh said. 

But there is one consequence: AI and its associated computing costs are expensive. “So we’re paying attention to what is the compute cost, and how is that connecting to cash runway, and how does that translate to a company wanting to go public earlier?” she said.  

The panelists also cautioned that it can be easy for investors, even sophisticated ones, to be burned on biotech investments. Barrett says to stay away from biotech startups that are not process driven or tied in with key opinion leaders. “In an inherently high-alpha asset class, those that seek to de-risk the process will be the ones that win,” which could take form through AI, creative financing or affiliation agreements.  

Barrett stressed the need for investors to be present at all stages of a company, acknowledging that there is a need at the pre-clinical level, but investors should also be active all the way to an initial public offering. 

“You’re going to have different investors,” Barrett said. “Some people want to give a donation, some people will want to [put] at risk capital, some people want to allocate to a hedge fund, but without [it] all, it won’t work.” 

Related Stories: 

What Is It Going to Take to Get to the End of Cancer, and Who Is Investing in It? 

Medical Technology and the Fight Against Cancer 

How Memorial Sloan Kettering Funds Its Cancer Fight 

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