Pension fund execs hopeful the private equity spigot opens again after 'challenging year'

Private equity was soundly trounced by the Magnificent Seven in 2024, leading to the asset class taking up a smaller portion of the largest retirement plans’ asset mixes, Pensions & Investments' annual survey data shows.

Investors’ portfolios continued to be pummeled by somewhat improved but still lower rates of distributions of profits from their private equity portfolios, depriving them of capital needed to make new commitments. Many investors coped by making fewer commitments, with some selling limited partnership interests on the private equity secondary market for portfolio management and liquidity.

And Donald Trump's election victory and his new administration's policies may also have an impact on distributions, with some expecting an increase in exits from pro-business policies that would boost distributions, but also wary of increased volatility from erratic policy changes that could have a chilling effect.

This year’s survey of the largest U.S. retirement plans revealed uneven growth of private equity assets. Private equity accounted for 13.5% of the aggregate portfolio of the defined benefit plans among the 200 largest plan sponsors as of Sept. 30, down from 14.5% a year earlier, P&I data shows. At the same time, while the assets of the top 200 invested in private equity grew by 6.5% to $779.1 billion, buyouts and venture capital both fell during the 12-month period ended Sept. 30. Buyout assets were down by 4.8% to $398.1 billion and venture capital dropped by 7.4% to $53.9 billion. (This is the first year that P&I's survey has asked for assets specifically invested in growth equity and co-investments, which totaled $24.9 billion and $16.8 billion as of Sept. 30, respectively.)

“2024 was an extremely challenging year for the private equity asset class ... I’m not aware of a more challenging year from a relative return perspective,” Michael Langdon, director of private markets, told the Oregon Investment Council at its Jan. 22 meeting.

The council manages the Oregon Public Employees Retirement Fund, which had $105.4 billion in total assets and $101.5 billion in DB assets as of Sept. 30, according to P&I data. During the year, Oregon's private equity portfolio dipped by 3% while its buyout portfolio grew by 3.2% to $25.8 billion and $22 billion, respectively. The fund’s venture capital assets were down 9% to $1.1 billion.

Langdon said that 2024 was the second year in a row that private equity “meaningfully underperformed” its benchmark of the Russell 3000 plus 3%.

According to a report for the council’s Jan. 22 meeting, OPERF’s private equity portfolio underperformed its benchmark for all time periods, including 7.2% internal rate of return compared to its benchmark of 39.2% for the year ended Sept. 30.

That was a challenging benchmark to achieve especially with the stock market rally mainly concentrated in the stocks of seven large U.S. technology companies, the Magnificent Seven, he said.

Oregon's pension fund has a 20% target to private equity. As of Sept. 30, the pension fund's actual investment in private equity accounted for 27.9% of the portfolio. By year end, Oregon's actual private equity allocation had gone down to 26.5%. Pensions fund officials have some leeway with target ranges of 15% to 27.5%.

Pace of distributions

“We remain disappointed with the pace of distributions,” Langdon said. The mergers and acquisitions markets is slower than his team would have expected and so there are fewer realizations in the portfolio, he said. As a result, the pension fund is overweight private equity, he added.

However, overall distributions to private equity investors ticked up a bit compared to 2023 and 2022, said Steven Hartt, managing principal at consulting firm Meketa Investment Group.

Global private equity exit value in 2024 jumped nearly 20% to $807.1 billion, while the number of exits fell 15% to 2,939 from the prior year, according to PitchBook.

“2023 and 2022 were pretty slow years” for distributions of money back to investors, Hartt said. “2024 was a bit more robust."

It wasn't as large as 2021 but it was up from where the lows had been,” he said.

Secondary market deals continue to be a growing segment and 2024 was an active year, Hartt said.

The secondary market hit a record $152 billion in volume, surpassing the previous high of $126 billion set in 2021, Lazard’s secondary market report shows. The biggest sellers were financial institutions and insurance companies, accounting for 27%, followed closely by pension funds at 25%. Fifty-one percent of the sales were for portfolio management, up from 38% in 2023, given improved pricing for fund portfolios, Lazard said. Liquidity was the next most popular reason for 33% of the sellers, down from 44%.

Indeed, some of the top 200 pension fund investors used the secondary markets during the period. OPERF had net distributions of about $2.2 billion, with $2.4 billion in capital calls vs. roughly $4.7 billion in distributions in 2024, according to its private equity report. Oregon’s distributions included about $1.2 billion of proactively generated liquidity by secondary market sales, according the report shows.

Eric Messer, investment officer, private equity at Oregon, during the same Jan. 22 meeting, said that investment officials through a program with private equity consultant Pathway Capital Management have been monitoring and in some cases liquidating a legacy private equity portfolio made up of 51 general partners and 91 limited partnerships. Over the last five years, the program has generated a total of $4.5 billion in proceeds from sales.

Even without the spike in proceeds from the secondary sale at the end of 2024, Oregon and Pathway executives have been seeing a gradual improvement in the distribution profile over the course of the year.

Los Angeles County Employees Retirement Association, Pasadena, Calif, also sold a portfolio of limited partnership interests during the survey period, said Jonathan Grabel, chief investment officer. LACERA’s private equity portfolio fell by 5% to $13 billion as of Sept. 30 from a year earlier, with its buyout portfolio also dropping 5% to $10.7 billion.

In May, pension fund officials reported the sale of 17 limited partnership interests with an aggregate value of $1.36 billion. LACERA officials are selling LP interests in funds that “were not the most strategic for us to free up allocation” for investments that are more consistent with its last private equity portfolio structure review, Grabel said.

As part of that review, the board reduced its venture capital and growth equity allocation to a range of 5% to 25% of the private equity portfolio's net asset value from a range of 15% to 30%, reflecting market dynamics.The board also changed its allocation to private equity co-investments and secondary purchases to a range of 5% to 35%, from a range of 10% to 30%.

These LP interests LACERA sold include those in funds that are well past the end of the investment periods, funds LACERA officials thought are at full value and funds of firms that LACERA has declined to re-up with, meaning investing in newer vintage funds, he said.

A big reason that the secondary market had a record transaction volume year is that fundraising and the exit markets have slowed, said Matthew Swain, head of direct placements and secondaries within Houlihan Lokey’s private funds group.

Many LPs say they are selling for portfolio construction reasons and they are selling fund interests of managers in which they have low conviction or funds that are at the tail end of their lives, “but some have decided to sell, at least in part, for liquidity,” Swain said.

“There’s a half a trillion dollars (of capital commitments in funds with investment periods about to expire) about to hit a wall or a fund extension,” he said.

Investors are selling positions in buyout funds because they command a high price on the secondary market as well as LP interests in venture capital funds of managers with whom they no longer wish to invest, Swain said.

According to Lazard, the average price of early stage venture capital and late stage venture capital increased 3.9% and 3.1%, respectively.

Fundraising hit

The slow pace of distributions sent back to investors in 2024 negatively impacted fundraising. Oregon's $2.4 billion in commitments in 2024 was below the bottom of the council’s private equity pace range of $2.5 billion to $3.5 billion, noted Angela Schaffers, investment officer, private equity at the same meeting.

“It will remain at the bottom range until we see distributions normalize,” she said.

Those lower distributions were a key factor in slower fundraising last year, said Chris Webber, managing director at placement agent Monument Group. Money being sent back to investors has been falling since 2019 with investors getting less money back than they there private equity pacing modeling had predicted, Webber said.

What’s more, the number of funds in the market is at an all-time high, he said.

“There’s more competition than ever of funds looking to raise capital,” Webber said.

The asset class is more mature and investors' private equity portfolios are pretty well established. This means that investors are only adding new managers at the edges, he said.

“There are not that many people (LPs) putting their foot on the gas and growing portfolios,” unlike 20 years ago when private equity was a burgeoning asset class, Webber said.

There is reason for hope in 2025 with transactions activity starting to pick up in the fourth quarter, he said.

Monument executives are hopeful that transactions will continue to climb and distributions pick up "filling the coffers of LPs who have been pinching pennies,” Webber said.

Gunnar Overstrom, partner at $9.7 billion private equity firm Corsair Capital, said that for private equity, last year ended better than it started.

The market for exits got better over the course of the year, he said.

The backdrop from an economic and market perspective was quite good with inflation expectations declining over the course of the year, Overstrom said.

The election changed everything, he said.

“We are going from one of the most anti-business administrations with Biden and Harris to one of the most pro-business administrations with Trump-Vance,” Overstrom said. “If you talk to private equity dealmakers, CEOs of companies, investors ... the optimism and 'animal spirits’ are alive and well.”

As a result, Overstrom said he expects the pent-up deal activity from transactions that didn’t happen over the last couple of years to “start to clear in 2025 and 2026."

“LPs are responding anxiously. It’s been a bit of a one-way street,” he said.

One risk is that with this style of executive branch administration there will be more volatility, Overstrom said.