Large pension plans nearly quadruple PE exposure

As critics in the US pour scorn on the private equity industry, one influential group appears to be doing the opposite. Research shows the returns generated by the asset class have caused large public pension plans to almost quadruple their exposure over the last decade.

Large US pension plans – defined as those with assets of more than $1 billion – have increased their average allocation to private equity from just 1.58 percent in 1992 to 11.18 percent last year, according to data provided by the Wilshire Trust Universe Comparison Service. Over the last decade, the allocation has almost quadrupled from 3.11 percent in 2001.

In dollar terms, large US pension funds had about $220 billion committed to private equity as of last September, up $50 billion from a year earlier.

Even in the thick of the financial crisis, pension funds continued to back the asset class. From 2007 to 2008, the average allocation rose from 5.52 percent to 7.95 percent, before slipping slightly to 7.66 percent in 2009. Since then, the increase has continued apace, to 8.65 percent and then 11.18 percent last year. 

The reason? The performance generated by private equity has far exceeded that of publically traded equities in that time, according to Wilshire TUCS data. Median one year returns as of September 2011 for the equity portion of pension funds’ portfolios stood at -2.69 percent, compared to 18.22 percent for private equity.

The median five year returns were -0.86 percent for equities and 6.63 percent for private equity; moving to ten years, the figures were 4.96 percent and 6.96 percent.

As US Republican Presidential candidate Mitt Romney draws fire from rivals for his stewardship of buyout group Bain Capital, and critics on both sides of the Atlantic clamour for more punitive taxation of the asset class, the findings that millions of state employees are benefiting from the asset class’ outperformance relative to public markets may provide a useful counterpoint for industry proponents.