Private Equity and Pension Funds

With all the focus on carried interest and private equity taxation drudged up by the President’s latest budget, it’s easy to see private equity as sucking out value from the economy–that’s the way our industry was described in the election and by many of those looking to raise taxes on private equity.  But the Private Equity Growth Capital Council and other proponents of maintaining the capital gains tax treatment for private equity firms have reportedly been reminding Congress and the public of the positive impact of the private equity industry.

One important relationship highlighted by the PEGCC in a report they’ve been disseminating on the Hill is the one between private equity funds and pension funds.  Pension funds are a major institutional investor in private equity and the report explains that private equity funds are especially important to the health of pension funds today because of the incredible shortfalls many pension funds are facing.  Private equity relies heavily on the capital committed by pension funds and pension funds, in turn, are highly dependent on the above-market returns typically offered by private equity funds.  As you can see in the graph below, pension funds make up a huge chunk of the capital raised and invested by private equity funds.

Private Equity Investors Funding

In the wake of the financial crisis, pension funds are again looking to private equity to make up for the losses they suffered in the last decade.  In the chart below, also taken from the PEGCC report, you can see how pension funds have benefited from private equity investments with returns higher than fixed income, real estate or equities. So it’s little wonder why pension funds are more aggressively investing in private equity post-crisis.

PEGCC Pension Funds

The average private equity fund, too, suffered from the financial crisis and needs the stable, substantial capital commitments from pension funds to make up for investors that have fled and the tepid response many funds have received in the last couple of years (as shown in this fundraising update). The long-term investment horizon that is common among pension funds is also a key benefit to private equity funds which invest over a period of several years.   For many reasons, this relationship is a vital one that should be maintained for the long-term health of both pension and private equity funds.


tags: private equity, pension funds, pension fund, private equity and pension funds, buyout funds pension funds, pension fund investments, private equity pensions, private equity pensions, private equity fund investors, pension funds investors

About Richard Wilson