Pension Funds Continue to Pour Money into Faltering Buyout Business
With hedge funds collapsing and the buyout business in the doldrums, pension funds are pouring money into "alternative assets" (including private equity) as never before.
According to Global Private Equity Review, the 10 largest public pension funds now have over USD 120 billion invested in the buyout business. California's public employee fund CALPERS, the largest US public pension fund with USD 239.2 billion in assets, last year raised its allocation to private equity from 6 to 10% (and also began acquiring direct stakes in some of the largest funds); the Washington State Investment Board (USD 81.9 billion in assets under management) topped that by increasing from 17 to 25%. Where ten years ago some 50 investment sources (limited partners) accounted for 80% of the money flowing to the buyout funds, there are today over 3,800. The phenomenon is not limited to the USA; Increased allocation to pe by pension funds is documented in a study commissioned by Uni (Pension Fund Investment in Private Equity, available here ), which shows that over half of the largest 110 pension funds outside the USA were investing in private equity. Global Private Equity Review estimates that pension funds account for 27% of the funds under management by global private equity.
With record sums pouring in but takeover targets scarce with lending virtually frozen, a mountain of uninvested "dry powder" of committed funds in search of outlets is accumulating. The uninvested capital is estimated to total some USD 450 billion (up from USD 300 billion at the start of 2007) - on which pension funds are paying "maintenance" fees of 2%. That's up to USD 9 billion in fees to serve as a cushion to offset the predicted flat or negative performance fees as exits stall and bankruptcies rise.