“Year after year, private equity investments stand as the best source of long-term returns for US public pensions, net of any management fees. In fact, in an analysis of 163 US public pensions, the median annualised return for the past 10 years from private equity was 8.6 per cent a year compounding, versus a much lower 6.1 per cent for public equity, 5.3 per cent for fixed income, and 4.7 per cent for real estate.”
“Private equity investments for the Pennsylvania Public School Employees’ Retirement System and Pennsylvania State Employees’ Retirement System have also far out-earned public equities over the past decade, after all fees. The teachers’ pension system had a 7.74 per cent net 10-year annualised return on private equity, while the state employees’ pension return was 9.5 per cent.”
“Meanwhile, their returns on international stocks (the majority of equity holdings) had 10-year annualised returns of just 3.96 per cent and 3.3 per cent, respectively.”
“Private equity can deliver these higher returns because it is skills-based, hands-on business building. PE firms employ large teams of some of the nation’s best business executives. The PE firms actually own and operate entire companies and make them better. This hands-on majority ownership of companies is a more costly way to invest, but has produced better returns “all in”, after the costs.”
“Nor is there any secrecy surrounding private equity contracts, despite what Mr Flood suggests. The pension plans enter into a very detailed limited partnership agreement (LPA) that sets clear, mutually agreed terms before any investment is made.”
“Some asset classes such as Treasury bills have low or no fees, but these assets generally do not deliver enough returns to pay for the pensions that workers need. In contrast, skills-based private equity may have higher fees, but has been the top performing asset class for the pension funds for many years after paying all fees, and private equity has delivered the returns that workers need to keep their pensions safe
.”
