U.S. pension plans continued their move into private equity and real assets in search of return and a safer alternative to equities.
Many alternative investment asset classes represented in Pensions & Investments' annual survey of the largest U.S. retirement plans exhibited growth in the 12 months ended Sept. 30. Among defined benefit plans in the top 200 retirement systems, energy and infrastructure investments had the greatest increases, up 40.8% to $32.1 billion and 24.2% to $28.7 billion, respectively, albeit from small bases. Growth rates for private equity and real estate equity in the survey period were similar to the year-earlier gains, up 10.7% and 6%, respectively.
But the wave of capital moving into alternatives did not lift all sectors. Mezzanine reversed course from P&I's 2017 survey data, dropping 28.3%, while for the third straight year, distressed debt assets fell, dropping 12.3%.
"It was a risk-off year," said Stephen J. Nesbitt, Marina del Rey, Calif.-based CEO of alternative investment consulting firm Cliffwater LLC. "People found stocks are risky and moved to private equity."
Across P&I's top 200 universe, private equity accounted for 8.7% of the aggregate defined benefit allocation as of Sept. 30, compared with 8% as of Sept. 30, 2017. Public pension plans had the largest average percentage of their portfolios in private equity at 9.3% as of Sept. 30, up from 8.8% in the year-earlier survey. Among corporate plans, private equity was up to 6.2% from 5.7%, and the average exposure among union plans was 5.8%, a slight increase from 5.7% as of Sept. 30, 2017.
The net return for Cambridge Associates LLC's U.S. Private Equity index was 13.52% for the nine months ended Sept. 30, and for the Cambridge U.S. Venture Capital index it was 18.07%.
At the same time, investors are not accepting alternative managers' business-as-usual terms and conditions because "there's a big push to reduce fees," Mr. Nesbitt said.
This pushback most likely had an impact on hedge fund assets, he said.