PensionsApril 18, 2023

Global Pension Funds Fall Short of Private Equity Targets in Q1

CalPERS had the largest under-allocation, missing its target by more than $11.3 billion.

Reported by Michael Katz

Pension funds worldwide fell slightly short of meeting their private equity allocation targets in the year’s first quarter due to uncertain macroeconomic conditions affecting institutional investment decisions, according to S&P Global Market Intelligence.

Among 365 global pension funds, the median allocation to private equity was $276 million, compared with a median target allocation of $280 million, according to S&P Global Market Intelligence and Preqin. The under allocation was attributed to a relative dearth of private equity and venture capital fund launches during the first three months of 2023, compared with the year-ago period. Only 30 funds with more than $100 million were launched worldwide during the first quarter, down from 450 during the first quarter of 2022.

The California State Teachers’ Retirement System and the California Public Employees’ Retirement System had the largest allocations to private equity during Q1 at $46.73 billion and $46.26 billion, respectively. The lowest allocation was $1 million from Burlington Employees’ Retirement System.

Despite having the second-largest allocation during the quarter, CalPERS had the largest under-allocation, missing its target by more than $11.3 billion, which was attributed to a recent increase in its private equity goal. In January, CalPERS announced it was increasing its portfolio’s allocation to private equity to 13% from 8%, beginning with the 2022-23 fiscal year.

S&P Global Market Intelligence’s 2023 Private Equity Outlook Report, which surveyed 246 private equity firms, 129 venture capital firms and 131 limited partners, found that approximately 60% of limited partners with less than $500 million in assets under management said they will increase their allocation to private equity; however, fewer limited partnerships with larger AUM expect to do the same.

According to S&P, investor hesitancy was due to the uncertain direction of inflation and interest rates and the “denominator effect,” which overexposed some institutional investors to private equity as public markets fell.

“Whether the slight under allocation represents a temporary adjustment to the current investment environment or the beginning of an allocation reassessment remains to be seen,” the firm stated, noting that Preqin forecast a sharp decline in institutional global private capital fundraising to a 3.57% compound annual growth rate between 2022 and 2027, compared with 11.70% CAGR between 2015 and 2021.