16 June 2019

Pensions Weigh Options for Private Equity Cash

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U.S. pension funds face a dilemma that might be considered a nice problem to have: record amounts of capital flowing back from private-equity investments.

Strong markets have given the private-equity firms backed by pension money the ability to sell companies, which generates cash for investors. These funds last year returned $134.6 billion to pension funds and other investors, according to Cambridge Associates LLC, topping 2012's record of $115 billion.

But all that cash coming back from private-equity investments is upsetting the careful balance of investments that pension funds must maintain to achieve steady returns over decades to pay thousands of retirees.

Some have opted to double down on what has been a lucrative asset class, pushing out more capital to private-equity firms rather than risk falling short on their investing targets. But others are concerned about what might happen if there is a serious market setback.

Their concerns stem from the financial crisis, when some pensions found that as the value of their investments in public stocks went down, the proportion allocated to private equity in their portfolios ballooned. That is what happened to the Los Angeles County Employees Retirement Association, which exceeded its target by such a wide amount that it had to halt commitments to private-equity firms from June 2008 to May 2010, according to an investment memorandum. Managers of the pension system, known as Lacera, said that hiatus threatened the consistency of its overall returns.

Adding to the dilemma: Private-equity firms are sitting on a mountain of cash to invest. Some pension funds are worried that adding to the private-equity stockpile will lead to rash investing and overspending. A recent report from Bain & Co. said private-equity firms' unused cash amounted to more than $1 trillion at the end of 2013.

"The biggest concern is that we may be at the very beginning of a horror story, where the good times are rolling but eventually we may see limbs get chopped off," said David Fann, president and chief executive of TorreyCove Capital Partners LLC, a consultancy that advises pensions.

Still, some pension funds have opted to increase allocations to private equity.

Click here for the full article in the Wall Street Journal.

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