Pension Funds Cash In On Asset Most Can't Access

Friday, 25 Oct 2013 02:03 PM

By Michelle Smith

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Private equity is outperforming all other asset classes, according to a report from the Private Equity Growth Capital Council. Public pension funds are reaping big rewards, but most Americans can't invest.

Private equity is the only asset class delivering annualized returns over the 8 percent target set by most public pensions, PEGCC Vice President of Research Bronwyn Bailey said in a press release.

On average, public equity delivered 10 percent annualized returns to public pension funds over the last decade, a record no other asset can touch, says PEGCC.

Editor's Note: Ordinary Man Retires at 42. His Secret to Success . . .

By comparison, stocks were at 5.8 percent, bonds at 6.6 percent and real estate at 6.7 percent, says the Pittsburgh Business Times.

The Pennsylvania Public School Employees' Retirement System is a major private equity investor, the Times notes.

In the past 10 years, PSERS earned a 13 percent annualized return on the $10.7 billion it invested in private equity. According to the PEGCC report, PSERS ranks ninth in terms of the best returns. Topping the list is the Massachusetts Pension Reserves Investment Trust, with a 15.4 percent 10-year return.

“Pension investment in private equity helps to offset underperforming asset classes and alleviates some financial stress on pensions, their members and the constituents who support them,” Bailey said.

“Private equity continues to strengthen the retirement security of the millions of American police officers, firefighters, teachers and administrators who rely on hard-earned pension benefits” Steve Judge, president and CEO of the PEGCC, added in the press release.

Given the results and lack of comparable options, it's little wonder the data shows public pension funds raised their stakes in private equity over the past year.

With 10.3 percent of total public pension investments in private equity, it's the third most invested asset class, trailing only public equity and fixed income.

Meanwhile, CNBC points to the alarming situation for the broader labor force. Americans are plagued with debt and ill-prepared for retirement.

A Wells Fargo report found that 69 percent of middle-class Americans, making between $25,000 and $100,000 annually, have no savings plan.

Many of these people don't have the opportunity to use private equity to play catch-up. Unless you are a pension fund chief investment officer, or are a public sector worker that the pension CIO is investing on behalf of, your retirement plan isn't likely to access private equity, says CNBC.

And it shows in the 5.8 percent return that private workers see in their stock-heavy portfolios, says CNBC.

Still, some argue the average American should not long to put their retirement funds into private equity.

“My general preference would be to avoid asset classes with a higher probability for volatility in a vehicle that should be making capital preservation its highest priority,” Tim Maurer, vice president at The Financial Consulate, told CNBC.

Editor's Note: Ordinary Man Retires at 42. His Secret to Success . . .

“To the degree that any alternative investment in a pension plan lowers the overall portfolio's standard deviation, I'm interested,” Maurer said. But, “I have very little interest in re-prioritizing growth over capital preservation for pension plans as well as portfolios for individuals in or near retirement,” he added.

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