How US public funds fuel private equity (Financial Times)

In addition to considering the impact on pension funds, this article also makes one ponder the long-term impact on the private equity (LBOs) funds themselves. Can private equity (as an asset class) continue to efficiently absorb and deploy the continuing influx of pension fund capital? Can private equity really scale to deliver expected returns by doing multi-billion dollar deals? The capital has to be deployed somewhere ... right?

Some excerpts ...

"The public funds charged with securing the future of America's pensioners are a crucial driver of the current boom in the private-equity industry. By channelling an increasing portion of the nation's retirement pool into buy-out funds, the public custodians are feeding the cycle of takeovers, restructurings and sell-offs that define private equity."

"We are the big bucks now," says Jay Fewel, an Oregonian who has been running the private-equity division of his state's investment office since 1989. This year, Mr Fewel has already made commitments worth $3.5bn to buy-out firms.

"the 1.4m members of the California Public Employees' Retirement System, the largest public pension fund in the US, in the last fiscal year reaped a return of more than 19 per cent on the $11.3bn Calpers devoted to private equity from its $211bn portfolio. Over the past 16 years, Calpers has earned 33 per cent more through private equity than if it had invested the same amount in the equity markets."

"Public pension funds have nearly doubled their exposure to private equity over the past decade and on average invest some 8% of their funds in the asset class, according to Russell Investment Group, an investor services company. By comparison, corporate pension funds invest less than 7% and their exposure has decreased slightly since 1995.'

"For those who do not tread as carefully, the consequences of investing a lot in poorer performing funds, and at what many observers view as near the peak of the market, could be dire. Even Calpers, an early investor in private equity and a fund that by virtue of its size and pedigree can get access to the best deals, is moving to halve the number of firms it deals with to about 70."

"According to one private-equity headhunter, the entire budget of Oregon's investment office is at the lower end of what a senior partner at a large buy-out shop might expect to make in a year – even before any share of the profit from deals is doled out."