US pension funds see happy private equity returns

It’s been a good year for some of the big US pension systems: a number have already reported returns from their private equity portfolio significantly higher than last year’s single-digit figures. 

Two of the big winners have been California Public Employees’ Retirement System and California State Teachers’ Retirement System. The Sacramento duo posted very similar private equity returns – 13.6 percent for CalPERS and 13.9 percent for CalSTRS. Last year, the two returned 5.4 percent and 5.9 percent respectively.
The Florida State Investment Board, which includes the state’s retirement system, posted a 10.65 percent return for its private equity portfolio, having returned 7.22 percent for the 2012 fiscal year.

These three results are more or less in line with the median return for pensions with more than $1 billion in assets, which according to The Wilshire Trust Universe Comparison Service was 12.4 percent. In 2012, the median private equity portfolio return was 5.17 percent.
The Alaska Permanent Fund, one of the largest US sovereign wealth funds, fared even better: its private equity portfolio returned 15.3 percent during the fiscal year, having returned 9.8 percent last fiscal year.

Although all of these LPs substantially increased their portfolio returns year-on-year, each one still missed its short-term benchmark. Alaska was shy by about 5 percent, while the California pensions were between 2 percent and 4 percent short and Florida missed out by 1 percent. CalSTRS’ benchmark is based on the Russell 3000 index, excluding tobacco and plus 300 basis points, while CalPERS’ benchmark is custom.
“When the public markets shoot up like a rocket like they did last year, our asset class isn’t going to keep up in the short-term,” said Margot Wirth, CalSTRS’ director of private equity. CalSTRS’ 10-year benchmark is 12 percent, which is right in line with its returns, Wirth points out.
The missed benchmarks aren’t entirely surprising, because it doesn’t make sense to compare returns on an annual basis, according to Kelly DePonte, a partner at Probitas Partners; a five-year horizon is more appropriate, he suggests.