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
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
"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.
for the full article in the Wall Street Journal.