Private equity rewards pensions

The private equity holdings of the world’s largest public-sector pension funds outperformed most other asset classes in the short and long term, new research suggests.

The 20 largest public pension funds now have an estimated $224bn allocated to private equity deals – or 5.5 per cent of their capital on average.

Their investment have provided strong returns, according to a study by Preqin, an independent research house that focuses on alternative assets.

The study of the financial statements of more than 150 public pension funds from North America, Europe and the UK suggests the returns on their private equity investments and also their fixed income holdings in many cases, outshone hedge funds, real estate and listed equities.

As of the second quarter of 2010, private equity and fixed income were the
only investment types to generate positive median returns across one, three, five and 10-year periods; the other asset classes fell into the red for at least one of the periods, the study shows.

All asset classes show positive returns across five and 10 years, but only fixed income and private equity showed positive returns across the three-year period, reporting respective gains of 7.6 per cent and 0.6 per cent.

“Private equity investments provide diversity within the pension funds’ investment portfolios, and have the potential to yield high returns,” said Tim Friedman, head of communications at Preqin.

As overall mergers and acquisitions activity starts to rebound this year, bankers expect it to throw up opportunities for private equity groups to team
up with big corporate groups, either by financing bids or buying non-core subsidiaries.

A return in force to dealmaking in Europe last year by private equity firms came in spite of continued tight supply of finance.

The value of company buy-outs almost trebled in Europe from €18.3bn ($25bn) in 2009 to €49bn last year.