Pensions Turn to Private Equity—But Will it Last?

A businessman looking at the words "private equity."

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The Maine Public Employee Retirement System (MainePERS), the pension fund covering public employees in Maine, has announced it will commit up to $100 million to Owl Rock Capital, run in part by veteran alternative investment manager Marc Lipschultz. MainePERS Chief Investment Officer Andrew H. Sawyer said that the $12.4 billion pension fund approved the commitment via its board, though it’s still subject to due diligence, legal review, and negotiations.

This isn’t the first time Owl Rock has gained a pension fund investor: the Oregon Investment Council, which oversees the Oregon Public Employees Retirement Fund, committed $860 million to six alternative investment funds, including Owl Rock, in June of last year. Of that total amount, Owl Rock received $150 million.

For much of 2016, it was quite popular for pension funds to turn to private equity. This year, however, those golden days are showing signs of slowing down as private equity firms struggle to deploy their record amounts of cash. The Financial Times reported that pension funds and other institutional investors gave only $3.2bn to private equity funds in January and February, compared to the $8.9bn given during the same time last year.

So what’s the reason for the change? According to Amin Rajan, chief executive of Create Research, big investors have turned their attention to private equity because they’re looking for returns in an overall low-yield environment. However, as public offerings decrease, investors are growing concerned about overcrowding in the private equity market.

“Future flows may ease for two reasons,” said Rajan in the Financial Times interview. “Lack of attractive targets and worries about exit strategies due to political risks.”

The lessening of investments this year may also be a reaction to the fact that, of the capital raised by private equities as far back as 2015, more than 80% still needs to be deployed.

Still, the game’s not entirely finished for the relationship between pension funds and private equity. Will Kinlaw, Senior Managing Director at State Street Global Exchange, notes that big investors like pension funds are still interested in private equity even if their investments have dwindled a bit. “Many of our big institutional clients are significantly underweight private equity relative to where they want to be. They are still looking for opportunities,” Kinlaw told The Financial Times.

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