Many of you may be unaware of the considerable investment that pension funds make in private equity firms. You probably assume that pension funds, in order to keep their funds safe, only invest in assets that are “public” and therefore more transparent to the investing community. However, over the years, pension funds have learned that private equity firms provide them with a nice vehicle for diversifying their holdings.
For example, it was recently announced that the Illinois Teacher Pension Fund was planning to significantly increase the portion of its assets dedicated to private equity investing. The fund currently has over $37 billion assets under management. Of that amount, about $3.4 billion is currently invested in private equity. Over the next five years they plan on committing $900 million to $1.4 billion each year to private equity funds. Their ultimate goal is to raise the portion invested with PE firms to roughly $7 billion dollars by the end of the five years.
According to the pension plan, 60%-80% of the increase in PE investing will be in “corporate financing opportunities”. The rest will be split between VC funds and distressed situation funds.
As you can see, this is a significant increase in the amount of capital they will be investing in private equity. Given the serious hit most pension funds took during the last recession, it is interesting to see a fund like this dramatically increasing the portion it invests in what historically many would consider to be a more “risky” investment.
But maybe history has shown the folks running this fund (and others like them) that the publicly traded assets found on the stock exchanges may, in fact, not be less risky! I am sure that as the pros running these firms calculate their internal rate of return required to cover the pending baby boom retirement wave, they realize that publically traded companies may not be the best investment vehicle to focus on. Given the experiences of these funds over the past 3-4 years diversification now, more than ever, is critical to their long term financial solvency.
As we have discussed before, the really good news is that more and more equity firms are targeting the middle-market. And with $500 billion already available to invest, planned increases to private equity, as demonstrated by the Illinois Teacher’s Pension Fund, will only add more capital to the mix. It truly is, as Pricewaterhouse Coopers states, becoming a seller’s market!
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