Overview
Several U.S. public defined benefit plan sponsors were very early adopters of alternative investments, such as Washington State Investment Board. Public pension plans broadly have now adopted real estate, private equity, real assets writ large. More recently many plans have added significant allocations to private credit.
Hiring activity has correspondingly seen a massive increase from around $25 billion a year to more than $100 billion. Private equity typically makes up more than half of hires annually.
Some 2,077 managers have received commitments from plans. Blackstone, across alternatives, has received almost $80 billion, more than twice as much as TPG, which has received more than $30 billion in allocations.
Real estate
Public defined benefit plans have allocated to real estate since at least the early 1980s and have allocated more than 5% of their portfolios to real estate since 2007. More recently, plans have shifted allocations to value-added, opportunistic and debt strategies, expanding on their historic allocations to core strategies.
Blackstone has received more than $30 billion in real estate commitments, significantly above Brookfield Asset Management and Lone Star Funds, which have received around $9 billion each.
Private equity
Private equity's importance in public pension plans has grown enormously. In 2023, the aggregate allocation to private equity was 15% up from 3.8% in 2003. That increase in allocations is reflected in the pace of hiring, which now averages more than $70 billion a year.
Although endowments and foundations have long invested in venture capital, public plans have started to increase allocations in recent years. Venture capital commitments the past three years were close to 10% of total private equity, up from an average of 5.4% from 2010 to 2021.
TPG and Blackstone have received more than $20 billion in commitments. Eleven managers have received between $10 billion and $20 billion in mandates. In total, 1,000 private equity managers have received allocations from U.S. public defined benefit plans for a total of $703.4 billion.
Real assets
Infrastructure is the real asset investment to which public pension plans have made sizable allocations as its stable cash flows and long-term nature align with most plans' goals.
Brookfield, Stonepeak and Global Infrastructure Partners have received more than $10 billion each in allocations.
Energy and master limited partnerships have seen large swings in allocations. MLPs received $4.5 billion in mandates, but that has been mostly been redeemed. Private energy funds received billions annually until 2020 when ESG and COVID-19-related turmoil drove allocations down significantly. More recently, private energy allocations have recovered, but with renewable energy receiving some of the investment commitments.
Although commodities, farmland and timberland have received attention over time, they have failed to attract significant allocations.
Credit
Distressed debt has consistently received allocations from public pension plans hoping to see outsized returns coming out of though economic times. Recently, direct lending and other private credit strategies have received an explosion of allocations. Ares Management, Blackstone, Goldman Sachs Group Inc. and Oaktree Capital Management have all received more than $7 billion in credit allocations.
Conclusion
The growth in alternative allocations will slow as most U.S. public defined benefit plans sponsors have already made significant allocations over the past decade. Pockets of alternatives, such as credit, infrastructure, venture capital and energy should see above-average growth rates. Although the brand-name alternative managers will continue to receive a large share, competition remains robust compared with the public equity and fixed-income landscape.
