Soaring fund sizes could be responsible for private equity extending its lead as the preferred alternative asset class for new commitments among US public pensions in the fourth quarter of last year.
The asset class secured 121 commitments from US public pension plans during the period, according to institutional investment data firm eVestment. Though a marginal decline from the 124 new commitments made in the third quarter, private equity far exceeded the 76 commitments made to real assets in the period, which fell from 91 in the previous quarter.
“We’re seeing a phenomenon in the market where the largest funds are becoming even bigger, so when those Goliaths come through the market it certainly does impact [the number of commitments],” Janet Brooks, managing director at placement agent Monument Group, tells Private Equity International. These larger funds could present a greater number of US pensions with the opportunity to invest.
General partners raised $409.6 billion across 543 funds closed in 2017, compared with $364.5 billion raised across 646 funds in 2016, PEI data show, with the average fund size up from $564.2 million to $754.3 million.
Apollo Investment Fund IX was 2017’s largest fund close at $24.7 billion, the biggest in private equity history. The fund was accompanied by several other mammoth closes, including CVC Capital Partners VII on $18.6 billion and Silver Lake Partners V on $15 billion.
Strong LP demand for the asset class has been driven by large distributions from private equity funds over the past three years, according to Rhonda Ryan, managing director and head of Europe, Middle East and Africa at consultancy Pavilion Alternatives. “[US public pensions] have received money back and will be looking to deploy that into private equity again,” she says.
Impressive performances have not only contributed to increasing contributions, but also rising appetites among individual institutions.
“Performance has been good and therefore investors want to increase their percentage allocation,” Brooks notes. “They’ve been able to do that because there are people raising very large funds and some very large dollars can go into those opportunities.”
In a June 2017 interview with PEI, Christopher Schelling, director of private equity at The Texas Municipal Retirement System, said there was the “possibility” that its target allocation could be doubled from 5 percent to 10 percent “at the discretion of our board”.
Last year, a Massachusetts Pension Reserves Investment Management Board committee voted to increase its target allocation for private equity from 10 percent to 11 percent after it outshone all other asset classes for the Boston-based pension plan in 2016. Orange County Employees Retirement System also raised its target allocation to private equity from 6 percent to 8 percent, according to a memo from the pension following a January 2017 investment committee meeting.