PEGCC: Pensions rely on buyouts to trump S&P 500

Private equity indices and public pension portfolios have consistently outperformed annualised S&P 500 returns, according to the Private Equity Growth Capital Council.

US pensions faced with the challenge of funding retirement plans of teachers, firefighters and police have consistently benefitted from private equity outperforming the public markets, according to a new study from the Private Equity Growth Capital Council.

Private equity has bested the Standard & Poor 500 public markets index in the five and 10-year time horizons by 4.2 and 7.0 percentage points respectively, according to the study, based on an analysis of median private equity return data from eight of the largest pension US systems.

The study also found that buyouts outperformed the S&P 500 for the one, five and 10-year time horizons by 1.8, 3.7 and 7.0 percentage points respectively, according to data from several private equity indices.

“It’s significant because private equity is a long term investment, and we believe that it should be judged on a long term basis, so the 10 year time horizon is a good one,” vice president of research at PEGCC Bronwyn Bailey told Private Equity International. “We’re showing that even during this very volatile rocky 10 years, private equity is still providing an 11.1 percent annualised return.

During the same time period, the S&P 500 generated a 4.1 percent return.

The S&P 500 outperformed both the private equity indices’ median returns and the pensions in the three year time horizon, which the PEGCC attributed to the financial crisis.

“On a 10 year basis, I think we will see continued outperformance from private equity,” Bailey said. “I think the volatility of the public markets during the last five years will influence the outperformance comparison, so that may be less certain.”

The PEGCC’s analysis were based on return data from limited partners including the California Public Employees’ Retirement System, the Florida Retirement System Pension Plan, the Michigan Public School Employees’ Retirement System, the New Jersey Division of Investment, the Oregon Public Employees’ Retirement System, the Pennsylvania Public School Employees’ Retirement System, the Virginia Retirement System and Washington State Investment Board.

The PEGCC study was conducted as part of the group’s regular quarterly research, though earlier this year, the PEGCC launched its “Private Equity At Work” campaign to combat negative perceptions of the industry in response to attacks made over the course of the US election season.