(January 22, 2013) — North American public pension funds continue to offer valuable capital to the private equity industry, Preqin says.
Preqin’s Investor Intelligence database that tracks 1723 investors actively looking to make new fund commitments shows 149 are North American public pension funds. Of these pension funds, 70% anticipate making new commitments to the asset class over the coming year.
Public pension funds in North America aiming to make new commitments in 2013, according to Preqin, include the $6.4 billion San Bernardino County Employees’ Retirement Association, which has planned commitments of $125 million over the next 12 months. The Seattle City Employees’ Retirement System expects to commit between $25 million and $30 million to private equity in 2013.
South Carolina Retirement Systems (SCRS) is also continuing to deploy capital to the asset class in 2013, the data firm noted. “In order to diversify its private equity portfolio by geography and strategy, SCRS will make commitments to third-party funds, including mezzanine, buyout, venture and distressed private equity vehicles, as well as investing in direct funds with specific strategies,” Preqin said in a release.
The majority of North American public pension funds are looking to invest in North America-focused funds (56.7%), followed by funds including Europe (41.3%) emerging markets (37.5%) and Rest of World (14.4%).
Buyout vehicles remain the preferred fund type for North American public pension funds, with 52.9% expecting to commit capital to such vehicles over the next 12 months. Thirty-nine percent will consider distressed private equity, while 42.3% and 31.7% will consider investing in venture capital and growth funds respectively. Timber and natural resources vehicles are the fund type preference for 21.2% of North American public pension funds.
Yet that obvious propensity among public pensions to invest in domestic private equity firms may be hazardous, according to recent academic research. Two researchers at the Kellogg School of Management, Yael Hochberg and Joshua Rauh, recently published an article titled “Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments,” in the Review of Financial Studies. “Our analysis suggests that institutional investors of all types (endowments, foundations, public and corporate pension funds) exhibit substantial home-state bias in their PE portfolios,” the authors wrote. They found that institutional PE portfolios held an extra 8.1% of in-state investments on average, beyond what would be predicted statistically. For public pension funds, however, this over-allocation to in-state investment funds is even larger, at 9.7%.
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