Study: Pension funds' PE allocations rise

Sovereign wealth funds and family offices have also poured more of their money into the asset class.

Good news for GPs on the fundraising trail: pension funds’ allocations to private equity have gone up in recent years and there’s potential for this trend to continue, according to fresh research by the London Business School’s Coller Institute and fund of funds Adveq.

The study, which polled 1,208 US and UK pension funds, showed public pension fund’s allocations to private equity have increased to 5.64 percent of their assets under management (AUM), up from 4.5 percent, between 2005 and 2012. Private pension funds’ allocations rose to 5.33 percent from 4.99 percent in the same period.

The higher allocations to private equity have resulted in an extra $350 billion from public pension funds and $240 billion from private pension funds being pumped into the private equity industry. The increases coincided with a decline in schemes’ exposure to public equities, according to the study.

Yet while allocations are rising, pension funds are still lagging behind other institutional investors in committing capital to private equity. Allocations of family offices/endowments and sovereign wealth funds stand at 10 percent and 18 percent respectively of their AUM, the report said.

“I don’t think the percentages will go up to the same level [as sovereign wealth funds and family offices], but I still think there’s increased potential for pension funds, because they need more yield,” Sven Liden, chief executive and head of investor relations at Adveq, told Private Equity International.

Having to meet their liabilities is one of the reasons why pension funds are underweight compared to other investors, Liden argued. “The duty of pension funds is not to maximise returns, but it is to make sure that pensioners get what they were promised. I know a pension fund where 70 percent of the insured people are retired and therefore they have to liquidate most of their assets and won’t go into long term investments. That is an extreme example but this can influence asset allocation.”

Sovereign wealth funds and family offices have more flexibility in their investment choices, he added. “They have no regulations covering them; they can basically do what they want. If you are in that position and you are also looking at maximising your returns then it’s a very logical choice to go into private equity.”

Yet despite some of the difficulties for pension funds, Liden expects pension funds’ allocations to private equity to continue to rise. “Government bonds in many countries have gone down and they [pension funds] have to look for yield. The search for higher returns has been driving the higher allocations to private equity,” he said.

“Although a lot of funds were struggling to raise [capital] in 2013, if you look at the whole industry, the amount allocated to private equity is quite large,” he said.