While critics have recently tried to claim that private equity investment is risky for public pensions, private equity has – time and again – proven its ability to reliably secure sustainable retirements for Americans.
- A recent New York Times column falsely claims that public pension plans that rely on private equity funds are 1) “understating the perils and overstating the expected returns” and 2) failing to “[take] into account” the “true risks embedded in private equity.” These claims could not be further from the truth.
- Let’s be clear: private equity strengthens retirement security for millions of Americans without incurring additional investment risk. By offering a portfolio diversification avenue, private equity reduces risk for American pensioners and retirees.
- Public pension funds continue to trust private equity for a clear reason: these investments have a proven track record of securing returns that are less constrained by public market factors, providing long-term sustainability for Americans’ pension plans.
More than 89% of public pension funds invest in private equity because they trust the consistent returns it provides for American retirees. Where claims like those in a recent New York Times column rely on anecdotal evidence and speculative claims about the potential for risk in private equity investments, private equity’s track record of strong returns without higher volatility for public pension funds speaks for itself.
Private equity consistently outperforms public stock returns, benefitting retirees
As public pension funds face underfunding stemming from low rates of return and broader economic downturns, private equity investments offer much-needed support that consistently delivers solid returns less constrained by public market factors – all without increasing volatility for pensioners.
According to a February 2023 study from Cliffwater, state pensions’ private equity allocations produced nearly double the returns of public stock investments over a 22-year period – meaningful gains that helped secure retirements for American workers. The American Investment Council’s 2022 Public Pension Study demonstrates how private equity continually outperforms all other asset classes in public pension portfolios. Indeed, the study found private equity’s 10-year median annualized returns (15.1%) exceeded that of public equity by nearly 30%, real estate by nearly 60%, and fixed income by nearly 260%! Clearly, private equity investments have historically been, and continue to be, the best option for pensioners seeking returns less vulnerable to public market factors.
For fund managers like Farouki Majeed, CIO of Ohio School Employees Retirement System, the fund’s private equity portfolio has “consistently generated the highest return in the SERS portfolio over rolling 10 year periods for many years and has contributed to the long term sustainability of the pension plan.”
Similarly, as Craig Husting, CIO of Public School & Education Employee Retirement Systems of Missouri, has said, “A long-term commitment and investment in the private equity asset class has enhanced our ability to deliver on our mission of providing retirement security to Missouri’s educators and education employees after a full career of service. Private equity, within the Missouri PSRS/PEERS investment portfolio, has produced net of-fees returns significantly greater than the returns achievable in publicly traded stocks over all time periods.”
Ultimately, attempts to scare investors away from private equity time and again overlook the long-demonstrated success of these investments to secure returns that are less vulnerable to public market factors and that help stabilize plans for American retirees.
Read more: Time and Again, Private Equity Pays Off for American Pensioners
Providing investment diversification, private equity supports sustainable pension plans for Americans
Certainly, achieving these consistently high returns involves taking on some level of risk. However, recent claims seek to grossly overstate both the magnitude of this risk and the ability to assess private equity funds’ success.
Thanks to investment portfolio diversification made possible through private equity, funds are able to deliver returns while mitigating risk. As Cliffwater notes in their study, over the 22 year period “the higher private equity returns did not come with higher volatility,” noting that the annualized standard deviation of returns for public stocks was actually nearly 11% greater than that of private equity. Additionally, according to alternative asset investment advisory firm Hamilton Lane, private equity “consistently delivers higher risk-adjusted returns than public markets,” once again disproving baseless ideas that private equity investments quietly incur greater risk.
What’s more, Northwestern University’s Kellogg School of Management’s 2018 report further validates private equity’s long-term stability for pensions. Analyzing private equity’s role during the Great Recession of 2008, researchers found that “companies backed by private-equity firms were more resilient in the face of the financial crisis.” Beyond the Great Recession, the report’s findings about private equity funds’ resiliency directly counter claims that these funds present greater risk for pensions.
Private equity helps build better businesses and support American workers
The truth is clear: public pensions funds continue to see private equity for what it is – a viable, secure investment avenue that can sustain their plans better than public stocks.
Leading financial data provider Preqin reports that 95% of investors are expected to make private equity allocations in 2023, with 94% expected to maintain or increase their pace of investments in the long term. For America’s 34 million public servants that depend on private equity to support their retirement as of 2021, these long-term plans represent security and stability that other asset classes cannot provide.
Private equity’s support for American workers and businesses goes beyond public pension funds, too. In fact, 85% of private equity investments go towards small businesses with fewer than 500 employees as part of the industry’s longstanding commitment to fostering opportunities and generating value for Americans. These investments have helped increase job opportunities, improve wages and benefits, and support entrepreneurial innovation.
From these small businesses to public servants, private equity is helping Americans achieve business goals while providing the resources to support their workers – now and when they retire.
The bottom line
Private equity investments continue to maximize returns while minimizing risk – securing retirements for millions of America’s valued public servants and retirees and helping to build better businesses that provide the best support for their workers.
