Public Pension Plans’ Private Equity Fund Outlook
With the Dow Jones Industrial Average recently hitting a 52-week high, signs of a healthy economy are certainly present and many investors have begun to step off the sidelines and reinvest in alternatives. Among them are government pension plans, some of the largest institutional players in this market. They are reassessing current asset distributions and how to weight portfolios in the coming years. Because pension plans, especially those designed for employees in the public sector, typically have long-term capital appreciation goals, private equity is often a desirable investment structure.
In the past five weeks, BHA analysts have confirmed this sentiment during conversations with government pension plans in the U.S. and Europe. By a margin of almost 2.5:1, these pension plans expressed an interest in private equity over hedge funds. But why is this, and what types of private equity funds are currently most appealing?
The answer to the first question relates to the nature of private equity investments: they provide strong risk-adjusted returns and require a long-term investment horizon. One may think that a long lock-up is unattractive, but government pensions, unlike other institutional investors, take a long-term approach to investing. They are more focused on reducing overall portfolio volatility to decrease risk. These goals make an investment in private equity an obvious choice.
So what types of funds are government pensions most interested in at the moment? The two most popular strategies since October 1 are buyout and venture capital. More than 80 percent of the investors interviewed mentioned an interest in buyout, while nearly 60 percent thought venture capital attractive. An obvious reason why these strategies are appealing is their inherent goal of investing in the community. Buyout funds typically focus on mergers and acquisitions, which create jobs and increase economic activity. Venture capital funds focus on providing start-up capital to entrepreneurs who have a solid business model but lack the financial means to get a company off the ground. Both of these strategies directly support employment and, ultimately, economic growth.
In the wake of the economic meltdown, investors are eager to sustain the recent economic surge. Instead of focusing on profiteering, which may have been the case prior to the Great Recession, it seems that many investors are now considering how their capital can be put to work not only to provide solid returns but also to boost economic activity, increase employment, and facilitate a return to prerecession economic prosperity. As a result, BHA analysts anticipate that demand from government pensions for buyout and venture capital funds will continue to increase.