LP appetite for PE creates exposure shortfalls – report

Almost two-thirds of US public pension plans with private equity targets are under-allocated to the asset class, according to eVestment.

Record distributions from private equity funds and increased appetite for the asset class are leaving US public pension plans under-allocated to the strategy.

Public pension systems’ exposure to private equity was at 8.15 percent against an average target of 8.72 percent in the year to 31 March, according to eVestment’s latest Market Lens Asset Allocation Trends report.

The data software company’s report tracked private markets allocations among 163 US public funds with assets totaling $3.37 trillion.

Shortfalls in private equity exposure were partly due to pension plans increasing their allocations to the asset class. At the same time, record distributions from private funds have increased investors’ challenge of putting capital back to work in a competitive market, the study suggested.

Nearly 66 percent of the 80 pension plans with identifiable private equity targets were underweight against their private equity allocation.

Larger plans, with total assets over $10 billion, had higher private equity target allocations – an average of 10.51 percent – compared with smaller plans with total assets under $10 billion, which had an average target of 8.31 percent, the study found.

In addition, smaller funds had bigger shortfalls, driven by differences in implementation timing or challenges in investment sourcing because of their size, the study said. However, public pension systems across the size spectrum increased their allocations to private equity this year, PEI data show.

For example, the $233 billion California State Teachers’ Retirement System increased its private equity allocation by more than 60 percent, and the $80 billion Virginia Retirement System increased its allocation by 25 percent. The $8.8 billion New Hampshire Retirement System doubled its allocation to 10 percent and the $4 billion Boston City Retirement System increased its private equity allocation to 11 percent from 7 percent.

In addition, several pension systems, including Jacksonville Police and Fire Pension Fund, added private equity to their portfolio for the first time. Jacksonville Police and Fire has a 10 percent target allocation.

The implied net flow from the underexposure into private equity could be as much as $19 billion – good news for private equity managers who should expect more money to come their way, the study noted.

“The sheer volume of money that may flow into these [private] asset classes will also impact hiring at these investment firms, the size of deals they are able to put together and more,” noted eVestment’s global head of research Peter Laurelli.