Pension funds have long been a key backer of private equity yet the love affair is going through a rocky patch, writes Toby Lewis
Private equity has long been an investment class favoured by many pension funds globally due to the high returns it offers and the long-term horizon of investments. Yet some recent events are beginning to muddy the strong relationship between private equity firms and their pension fund backers.
Wide-ranging scandals at New York State’s pension fund and at the US’ largest pension fund California Public Employees’ Retirement System, among other large pension backers of private equity, has placed question marks about how rigorous investment in the sector has been. This has led to reform of how these two pension funds are allowed to invest in the asset class.
At the same time governments are increasingly regulating private equity, while some investment advisers are even questioning whether long strongly-performing buyout firms are as reliable an investment for clawing back pension funds’ deficits as previously had been hoped. There are even fears among those in the sector the changing demographics of modern society may hit investments.
Amid such uncertainty the amount of new commitments from pension funds to private equity has come down substantially. The $93.2bn of new commitments made to the asset class from pension funds last year is less than half the $204.4bn pension funds invested in private equity at the peak of the fundraising market in 2007, according to data provider Preqin.
The so-called “pay-to-play” scandal in the US shone an unsavoury light on some of the practices used to raise funds by private equity firms from public pension funds.
In February, Hank Morris, an adviser to New York State’s pension fund, was found guilty of effectively selling access to the fund. The case also involved big name firms, with US firm Carlyle Group and Quadrangle Group executive Steven Rattner, a US government advisor, among others, paying millions of dollars to settle claims against them. New York State in April permanently banned placement agents, lobbyists and elected officials from any pension fund business.
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