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IRA Financial Blog

Retirement Funds Bet Big on Private Equity

Key Points
  • Private equity uses individual investors
  • All diversification can be helpful
  • All investments can be a risk

Over the recent past years, there seems to have been an inverse relationship between private equity holding and the real estate and hedge fund holdings, in the retirement funds. While the private equity investments have continued to increase, real estate and hedge funds have decreased.

Although even investment experts are getting skeptical about private equity, retirement funds appear not to care the least. Many retirement funds are still bent on increasing their investments in private equity. This article will reveal more about this.

Private equity pools money from institutional investors including individuals with high net worth, insurance companies, pensions, and funds, for investment. They invest the money into purchasing companies, to restructure and then sell them or make them public for profit.

Pension funds have been a major source of funds for the private equity industry, contributing massively to its growth. According to Dealogic, in 2021 private-equity firms published deals in the US worth over $1 trillion.

However, over the last decades, private equity investments have become riskier enough to discourage further investment. One of the factors affecting the profitability of these investment funds is low rates. Irrespective of challenges, they have to survive, which has led to debts.

Meanwhile, from the recent findings of a trade group, the costs of setting up private-equity funds have also greatly increased over these years.

But surprisingly, these costs and risks seem not to be affecting investments in private equities. In fact, U.S pension funds’ investment in private equity has surged significantly – Preqin (an analysis firm) recorded 8.9% average holdings in 2021. This is almost $480 billion of state and local pension fund assets according to the Federal Reserve, an increase from roughly $300 billion of assets in 2018.

Although pension funds appear to be major players in the public market investments, they may not be the only ones. Sovereign-wealth funds, insurance firms, and endowments are also pumping money into the private equity industry.

Retirement officials, on the other hand, are also boosting their private equity portfolios, investing more money into it. In May 2021, the $75 billion Los Angeles County Employees Retirement Association increased its private equity target investment target from 10% to 17% of its portfolio and cut down on its target for stocks, from 35% to 32%.

One of the largest pension funds, California’s public worker pension fund, in November voted to increase its target allocation to private equity by almost $25 billion. However, the state and local government retirement funds seem to be taking a risk hedge position by relying more on the costly and illiquid asset class. Although the public market has shown strong performance in recent years, these government funds may not be so sure of decent future returns.

Final Thoughts

Securities and Exchange Commission Chair, Gary Gensler has shown his concern towards the risk of investing in private equity. He has asked whether these institutions bent on investing in private equity are making an informed investment decision. Perhaps with a little more information, they might have reconsidered.

Still, these institutions may have their reasons and convictions, all investment carries a measure of risk after all


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