Funds dial back expectations for returns
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Comvest closes credit fund at $1.3 billion
      Wall Street signage in the Financial District of New York
      Assets in alternative investments set record in 2020
      Non-profit questions dividend recapitalization play at Ares portfolio company
      Walker & Dunlop appoints managing director
    • Philip Pearson
      Hymans Robertson chooses head of LGPS investment
      Daniel Celeghin
      Indefi hires New York-based managing partner
      Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
    • Pandemic takes toll on real estate fundraising in 2020
      Swedish flags fly from a tourist souvenir shop in Gamla Stan in Stockholm on March 26, 2020
      Systematic hedge fund IPM to shutter after ‘lackluster’ performance, outflows
      Insurers taking on more portfolio risk as pandemic ebbs – survey
      American flags outside the New York Stock Exchange
      Stock shorts collapse as no hedge fund wants ‘head ripped off’
    • Pie chart showing different categories of asset allocation with a calculator
      Record keepers answer the call for adviser managed accounts
      Comfortable retirement still on track for most Americans despite pandemic – survey
      Pentegra joins with EPIC to offer 3(16) fiduciary services
      Joseph Healy
      Smaller DC plans place greater focus on improving financial wellness efforts
    • CDPQ boosts low-carbon assets to 10% of portfolio
      White House sets ambitious goal for greenhouse gas emissions by 2030
      Yale rolls out 5 principles for endowment on fossil-fuel investing
      Pension funds hear from beneficiaries on ESG – report
    • Girls Who Invest
      MetLife plans 3 internships for Girls Who Invest scholars
      Model home
      Resmark sees niche in buying, leasing model homes
      Riscura stories
      Dystopian tales explore altered retirement reality
      Joel Holsinger
      Ares wants to do good – and profit – with fund
    • The New York Stock Exchange reflected in a window of Federal Hall
      Infinity Q Capital to liquidate hedge fund due to mispricing
      Swedish flags fly from a tourist souvenir shop in Gamla Stan in Stockholm on March 26, 2020
      Systematic hedge fund IPM to shutter after ‘lackluster’ performance, outflows
      Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
    • The seal of the Securities and Exchanges Commission at the agency's headquarters in Washington
      SEC said to review fund disclosure rules after Archegos rout
      Trillium hires 2 to lead expansion into U.K.
      CDPQ boosts low-carbon assets to 10% of portfolio
      White House sets ambitious goal for greenhouse gas emissions by 2030
    • Blackstone AUM climbs 4.9% in latest quarter
      Trillium hires 2 to lead expansion into U.K.
      Credit Suisse logo
      Credit Suisse expects further hit from Archegos scandal
      Bill Hench
      First Eagle gives wing to small-cap equity team with liftout from Royce
    • Denmark’s ATP plans bid to build North Sea energy island
      Pennsylvania State Capitol in Harrisburg
      PennPSERS taps Verus for oversight consulting services amid probe
      State pension plan funding advances in first quarter – Wilshire
      Sacramento County Employees rebalances equity, fixed-income portfolios
    • Trillium hires 2 to lead expansion into U.K.
      Walker & Dunlop appoints managing director
      Bill Hench
      First Eagle gives wing to small-cap equity team with liftout from Royce
      Philip Pearson
      Hymans Robertson chooses head of LGPS investment
    • EQT closes latest private equity fund at $18.7 billion
      U.S. $100 bills
      AlpInvest raises $3.5 billion for latest co-investment fund
      ILPA members making diversity a bigger priority in private equity
      European private equity deal value, volume hit records for first quarter
    • Pandemic takes toll on real estate fundraising in 2020
      J. Tomlinson Hill
      Two Sigma takes quant expertise into real estate investing
      BentallGreenOak closes latest European fund at $2.3 billion
      Cohen & Steers adds team for new private real estate business
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
    • A coin representing Bitcoin cryptocurrency in the U.K.
      Cryptocurrency and digital assets
      Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Orange County Employees commits $55 million to 2 buyout funds
      Alexandria, Va., scouting for DB and DC plan consultants
      Gresham, Ore., hunting for 457 plan consultant
      San Joaquin County casts net for core bond managers
    • Orange County Employees commits $55 million to 2 buyout funds
      Alexandria, Va., scouting for DB and DC plan consultants
      Gresham, Ore., hunting for 457 plan consultant
      San Joaquin County casts net for core bond managers
    • Emerging Market Debt Manager Services
      Real Assets Consultant
      Passive Investment Management Services
      Active Extended Global Credit Manager Search
    • High-yield spreads narrow, default rates drop
      Private real estate funds continue rebound
      Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      BPTW cartoon
      P&I’s Best Places to Work marking a milestone
      CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • Robert Pozen
      Commentary: Maintaining corporate culture in an era of remote work
      John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • Invesco logo shown on the floor of the New York Stock Exchange
      watch video
      1:28
      Invesco’s bid for performance gains
      watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
    • POLL: Cryptocurrency investing
      POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • High-yield spreads narrow, default rates drop
      By the Numbers for April 2021
      Graphic: The state of DC plans
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
      Retirement Income Conference
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Private Equity
August 05, 2019 12:00 AM

Funds dial back expectations for returns

Once high-flying asset class might not provide projected boost to plan performance

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Neil Randall
    Neil Randall told the Texas board private equity continues to be a challenge.

    A number of pension funds are lowering their return expectations for private equity at a time when officials are counting on the asset class to help their entire portfolios reach expected rates of return.

    Return projections are falling, pushed down by a massive amount of capital flowing into the asset class — a sharp contrast to the double-digit returns investors once had been getting. Investors and their consultants now expect annualized returns in the high single digits over the long term.

    As a result, investors are cutting expected returns from the once-standard 300 basis points over the public equity markets and trying to determine how they will invest in private equity going forward.

    Some investors have cut their return expectations by as much as in half in the past 12 to 18 months. Among them are the $372.8 billion California Public Employees' Retirement System, $236.9 billion California State Teachers' Retirement System and the $54 billion Los Angeles County Employees Retirement Association. All three have lowered the premium they expect private equity to deliver over the public markets and, in some cases, changed the index.

    CalPERS and CalSTRS both cut their premiums to 1.5% from 3% over an equity index. CalPERS also changed the benchmark index to the FTSE Global All-Cap index from a custom blend of two other FTSE indexes. CalSTRS switched its index to the MSCI All Country World index from the Russell 3000. LACERA changed its private equity benchmark to a global public equity benchmark plus 200 basis points from a U.S. benchmark with a higher premium.


    Related Article
    Benchmark choices might blur view of performance
    Declining returns

    Academic studies have noted the declining returns. Buyout funds outperformed the S&P 500 by 1.75% annually in the 1990s and 1.5% in the 2000s, but since 2006 have had the same returns as that index, according to a 2015 study by finance professors Robert S. Harris, University of Virginia; Tim Jenkinson, University of Oxford; and Steven N. Kaplan, University of Chicago.

    Some trustees are starting to question whether private equity is worth it. Given falling expected returns, they wonder if they are being fully compensated for the risk. At a minimum, institutional investors are realizing private equity won't boost their portfolio's overall returns in the future unless they can reduce the cost of these pricey investments.

    When CalSTRS officials changed the system's private equity benchmark in July, Trustee Keith Yamanaka questioned why the West Sacramento fund was bothering to invest in private equity at all.

    Private equity was supposed to be a higher-returning asset class due to risks presented by the investments, Mr. Yamanaka said. "The risks have not changed but the return we are hoping to get is a little bit lower. I would want some assurance … that, in fact, despite the lower potential return, the risk still justifies our investment in the asset class. We may not want to overlook a potential issue that might come back to haunt us."

    Like many institutional investors, CalSTRS is banking on changes to its investment strategy in the form of its collaborative model to cut costs and more efficiently invest its capital, including bringing more aspects of its investment activity in-house.

    Currently, 8.7% of CalSTRS' private equity portfolio is in co-investments. Under the pension plan's collaborative private equity model, that is expected to increase substantially.

    The collaborative model could be one tactic CalSTRS can use to reduce costs and gain more return, said Steven Hartt, principal at CalSTRS' private equity consultant Meketa Investment Group Inc.

    The Oregon Investment Council, which runs the $76.6 billion Oregon Public Employee Retirement Fund, lowered private equity's annual expected return to 9.25% from 9.5% when it changed its asset allocation in April. The council did not change its 17.5% private equity allocation target or its benchmark.

    Earning outsized returns in private equity is far from guaranteed, experts say.

    "Performance of private equity is not that high unless you select the very best funds," said Ludovic Phalippou, professor of financial economics at Said Business School, University of Oxford.

    "I do not see a drop in private equity returns just yet, but would expect one for future returns due to silly fee structures'' negotiated during boom times, Mr. Phalippou said.

    Private equity and venture capital managers had a combined $3.3 trillion in assets under management, including $1.1 trillion in dry powder — capital raised but not yet invested — at the end of 2018, according to a recent PitchBook Data study. All that capital chasing private equity deals has led to a five-fold increase in transaction value over the last nine years, to $1.7 trillion in 2018, the report noted.

    Whenever the stock market performs well, investors wonder why they are bothering to lock up their money in private equity, said Sasha Grutman, co-founding partner of merchant bank Middlemarch Partners LLC.

    "If you have a long-term perspective, there is absolutely a place for private equity," Mr. Grutman said.

    Mr. Phalippou said large investors have the edge because they can push back against their general partners on certain terms. "They can co-invest and get other side benefits. They may save on transaction costs compared to deploying large amounts on public markets," Mr. Phalippou said.

    CalPERS and CalSTRS are doing just that. CalPERS' new investment plan will boost co-investments but also invest directly alongside a new outside entity that it will seed.


    Related Article
    Investors ponder wisdom of alts investments should stocks crash
    Five-year plan

    The $145 billion Texas Teacher Retirement System, Austin, in July unveiled a five-year plan to go beyond co-investing to co-underwriting, which is helping general partners find investment targets. The new private equity strategic plan is the result of a study the system launched in 2018 with help from consulting firm McKinsey & Co.

    Neil Randall, TRS private equity head, recently told the board past returns have delivered a premium over the public markets. Between 2000 and 2018, the pension plan's $21.5 billion private equity portfolio delivered a total of $12.2 billion more than investing in the MSCI All Country World index.

    Part of this excess return was the result of what the pension plan calls its principal investment portfolio. In that portfolio, the plan invests in private equity through innovative structures including co-investments, he said.

    The principal investment portfolio currently — 23% in 2018 — now accounts for 26% of TRS' private equity allocation and is slated to rise to 35% by 2023. This portfolio will include the new co-underwriting strategy.

    TRS is upping the ante in response to a more challenging private equity world that features high valuations and leverage, Mr. Randall told the board. "The message today is extremely similar to the message I have been delivering in the last few years, and that is valuations continue to be high in private equity," he said. "Private equity continues to be a challenging environment to navigate."

    So far, the higher valuations are being supported by the markets, but distributions and investment of capital have been a bit slower in 2019 and investor competition is stiff, he said.

    "(Private equity) space and strategy is becoming more and more crowded by other LPs that are trying to do what we are doing," Mr. Randall said. "Co-underwriting is looking at a transaction in real time alongside a GP," he explained.

    He equated co-underwriting to sitting down for dinner with the GP and co-investment to waiting with other LPs for scraps at the end of the meal.

    "We can actually get our equity investment (into a transaction) guaranteed," he said. "We are transitioning from being in a group of LPs working on co-investments, to an elite group together on transactions."

    Related Articles
    Warren's push for changes brings more attention to industry reforms
    Private equity descends on cheap Europe dangling 35% stock gains
    MassPRIM and Ohio School fund lead private equity returns
    Recommended for You
    EQT closes latest private equity fund at $18.7 billion
    EQT closes latest private equity fund at $18.7 billion
    AlpInvest raises $3.5 billion for latest co-investment fund
    AlpInvest raises $3.5 billion for latest co-investment fund
    ILPA members making diversity a bigger priority in private equity
    ILPA members making diversity a bigger priority in private equity
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center