However, there are reasons to be skeptical of public pension investment in private equity. While it is true that most private equity benchmarks outperformed the S&P 500 during the 2010s, it appears that public pension system investors did not benefit from this outperformance: their returns on public and private equity holdings were similar. Furthermore, it appears that private equity underperformed in 2020 and may not recover its edge in the decade ahead.
Over a long time period, annual returns on leveraged buyout funds are highly correlated with those of the S&P 500, raising questions as to whether private equity meaningfully adds to the diversification of pension system portfolios.
Pension systems should thoroughly evaluate the downsides of private equity investing before increasing their allocations to this asset class. These disadvantages include illiquidity, challenges in obtaining timely and accurate valuations, high investment costs, and lack of transparency.
Author(s): Marc Joffe
Publication Date: 27 January 2021
Publication Site: Reason