Private Equity Powers Record-Breaking Pension Returns

The asset class has outperformed even public equities for many institutional investor portfolios.

Several of the largest public pension funds in the US and the world have reported record-breaking returns for the past fiscal year. And while robust stock markets are often credited for the 20%-plus returns, private equity is consistently the top-performing asset class within many of the portfolios.

For example, the $469 billion California Public Employees’ Retirement System (CalPERS) reported a preliminary 21.3% net return on investments for the 12-month period ending June 30. The robust performance was led by the portfolio’s private equity investments, which outpaced its public equity investments by 43.8% to 36.3%.

And the $308.6 billion California State Teachers’ Retirement System (CalSTRS) reported a record 27.2% net return on investments for fiscal year 2020–2021 thanks to private equity investment returns of 51.9%, which outpaced its public equity investments by more than 10 percentage points.

The $67.9 billion portfolio for the Maryland State Retirement and Pension System (MSRPS), which also recently reported a record fiscal year return of 26.7%, was also led by its private equity investments. The asset class earned 51.85% for MSRPS during the year, compared with its public equity investments, which returned  44.54%.  

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And for the Public Employees’ Retirement System of Mississippi, not only was private equity the top performing asset class during the most recent year, with a return of 58.87%, but it’s also the pension fund’s top performing asset class over the past three, five and 10 years, returning 24%, 21.72%, and 16.61%, respectively, on an annualized basis.

The asset class has also been boosting returns for pension funds outside the US, as $50 billion Swedish pension fund AP1’s 11% investment return for the first half of 2021 was led by the 22.8% return produced by its private equity assets, while its domestic and developed market equities returned 19.6% and 13.5%, respectively. And the Ontario Municipal Employees Retirement System’s private equity investments surged 15.8% during the first half of 2021 after losing 8.4% last year, according to Bloomberg.

The asset class has been boosted by approximately $580 billion in new deals during the first six months of 2021, which sets the industry on pace for its first-ever trillion-dollar year. That’s almost three times what firms reported during the first half of 2020, and it marks a 53% increase over the second half of last year, according to EY, which said the “high-water mark” for private equity deals was during 2006–2007, when private equity firms collectively reported more than $750 billion in deals.

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