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The Extent and Evolution of Pension Funds’ Private Equity Allocations

Author: Talmor, E. & Vasvari, F.
Date: January 2014

We study the allocation to the private equity asset class for pension funds and other institutional investors and identify key determinants of these allocations.
Using a large sample of public and private (or corporate) pension funds over the period 2005–2012 and data collected from their annual reports, we document the following findings:

  • The private equity allocations of pension funds have been growing over the last eight years. This has led to a very significant increase in the amount of private equity fund investments being managed.
  • In the case of more seasoned public pension funds that were already reporting private equity investments in 2005, capital allocations to the sector nearly doubled from 4.6% to 8% by 2012.
  • Yet pension funds overall allocate far less of their capital to private equity relative to other institutional investors, such as endowment funds, family offices and sovereign wealth funds.
  • The gap between target and actual private equity allocations has narrowed over time. This suggests that pension funds have become effective in  deploying their capital into private equity over the period and that past commitments are being drawn down.
  • There is a strong negative relationship between private equity allocations and listed equity allocations. This indicates substitution rather than a complementary relationship between the two types of equity investment.
  • The larger and North American pension funds are leading the trend of increased allocation to private equity.
  • Conversely, allocations to private equity are strongly and positively associated with real estate allocations, indicating a trend of decreasing public equity allocations in favor of a broader set of alternative assets.
  • Pension funds that are smaller (average assets under management of approximately $1 billion) and are located outside North America invest more through private equity fund-of-funds than larger and North American pension funds.

Geography: Global

Type of study: Academic working paper

Relevant for: LP, GP All, Fund of funds, Associate

Source: The Adveq Applied Research Series, London Business School, Coller Institute of Private Equity

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