PEGCC Releases Whitepaper Highlighting the Interdependence Between Private Equity and Pension Funds
Judge: “Private equity plays a significant role in securing the retirements of millions of teachers, firefighters and police officers across the United States. In turn, pension investments in private equity provide the needed capital to strengthen and grow companies.”
Today, the Private Equity Growth Capital Council (PEGCC) released a whitepaper submitted to the House Ways and Means Committee Working Group on Pensions and Retirement called, “Long-Term Commitments: The Interdependence of Pension Security and Private Equity.” The report highlights the significant amount of capital pension funds commit to private equity and the financial gains they receive from the outperformance of these investments.
“Private equity plays a significant role in securing the retirements of millions of teachers, firefighters and police officers across the United States. In turn, pension investments in private equity provide the needed capital to strengthen and grow companies,” said PEGCC President and CEO Steve Judge. “This whitepaper demonstrates how private equity and pension funds are inextricably linked to each other’s success.”
Despite losses from other investment strategies during the Great Recession, one bright spot for pensions is the superior performance of private equity funds, which helped buoy overall pension returns. The PEGCC research found that the median public pension portfolio received 8.8% in returns from private equity, compared to 3.7% in public equity and 5.7% in total portfolio returns, annually over the past ten years.
“Pension fund commitments make up 43 percent of overall private equity investment and are essential to the private equity industry, just as private equity’s superior returns are vital to the financial health of pension funds,” said Bronwyn Bailey, PEGCC Vice President of Research. “Investments in private equity are the only asset class to produce annualized 10-year returns over the average pension target return of 8 percent. Without private equity returns, public pension plans across the country would incur greater unfunded liability, possibly resulting in higher pension contributions by employees and a spike in taxes paid by local residents,” Bailey concluded.
Over the last ten years, public pension funds saw their portfolio performance dip well below their targets, i.e., the investment return necessary to fund the retirements of the teachers, police, firefighters and other employees who rely on their pensions for financial security during their advanced years. If investment returns do not provide enough revenue to finance liabilities, the shortfall will be paid by pension employees or their employers, i.e., state and local governments that are funded by taxpayers.
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