Pension Funds Want Into Private Equity

[Editor’s Note: this story was updated on Aug. 10 to correct the circumstances of the CalPERS CIO leaving his post.]

Government pension funds have found a new way to profit in private equity.

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So says private equity.

The American Investment Council is out with a study proving its case. The study lists 10 large, mostly state-sponsored pension plans it says have gotten returns averaging 16% from investing in private equity deals.

The Michigan retirement system, it says, got returns of 15.4%. The one in Illinois got returns of 16.7%. 

Compare that with government bonds that now yield less than 1% and it’s easy to see the attraction.

A Growing Phenomenon in Private Equity

Pension investment in private equity has increased since a 2014 study by the World Pensions Council indicated U.S. pension funds had about 8.5% of assets invested in such deals.

The trend started in the 1970s, as pension funds saw falling returns in public markets. The trend accelerated during the Great Recession of 2008-2010. Funds soon began distrusting hedge funds that invested in public markets for them. They felt they were being treated as “lower echelons” of the capital food chain.

Getting into private equity deals was seen to be a way of being treated more like partners than customers.

Public pension plans represent huge pools of capital. The 15 largest U.S. pension funds in 2018 alone had assets of over $2 trillion. Their assumed rates of return averaged 7.5%.  Many have literal armies of managers.

While the funds have huge assets, they also have huge liabilities. Matt Taibbi made his reputation at The Rolling Stone with a 2013 study claiming Wall Street was looting the funds, costing workers their pensions. The piece highlighted the Rhode Island fund run by a then-unknown Democratic politician, Gina Raimondo. She’s now the state’s governor.

The Private Fund Raid

Today’s tub thumping for private equity is led by the American Investment Council (AIC). It claims to be a non-profit, independent group. In fact, it’s a lobbying group for private equity. The AIC spent $1.45 million lobbying in 2018 alone.

The AIC is headed by Drew Maloney, a veteran lobbyist who took a turn as President Donald Trump’s assistant secretary of state for legislative affairs in 2017-2018.  According to the AIC, pension plans have a median allocation of 11.9% in private equity deals. The $25.9 billion San Francisco City & County Employees’ Retirement System has 21.1% of its money in such deals.

Democrats call the AIC studies, conducted along with Ernst & Young, shams. They want private equity to take responsibility for the outcomes of deals pension fund money goes into. The idea is they should have “skin in the game.” 

The bill, whose lead sponsor is Sen. Elizabeth Warren of Massachusetts, is aimed at private equity practices of taking over companies, loading them with debt, cashing out, and letting the resulting companies crash. The idea is that the pension funds see big returns early but are left holding the bag when the deals go down.

The Bottom Line

Pension plans represent huge pools of funds that are subject to all kinds of political pressure. They’re too big to get these returns exclusively from buying stocks and bonds. They’re too big to get them exclusively from buying into Wall Street deals. Some now want to do the deals themselves. 

Pension funds are pressed to be socially responsible by the left. They’re pressed to be politically responsive by the right. They’re also pressed to deliver big returns that can only be had by taking on big risks.

But this is only increasing the pressure on them. The largest such fund, CalPERS, a $400 billion fund covering California state employees, wants to get into shadow banking and buying private debt.  The chief investment officer recently resigned.

Pension funds are in private equity to stay. Whether they’ll be tail or the dog in that market remains to be seen.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear,  available at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

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