More than half of pension funds exceed private equity allocation targets

Pension funds were the institutional investors most likely to be over their target allocation to private equity as global economic shifts clouded the outlook for private equity fundraising.

More than half of government-, corporate- and union-sponsored pension plans showed an overallocation to private equity in their latest publicly available financial reports, according to S&P Global Market Intelligence data. Corporate pension plans had the highest number of overallocated sponsors compared to underallocated.

Several other categories of private equity limited partners (LPs) — including sovereign wealth funds, foundations and real estate investment managers — were also over their allocation targets, but publicly available allocation data was limited, making it difficult to draw conclusions.

Overallocation could limit pension fund commitments to new private equity funds, undercutting attempts to reverse the three-year slide in global fundraising.

Portfolio constraints

The slow pace of exits, which fell to a two-year low in the first quarter, is another factor restraining private equity fundraising. The sale or IPO of a portfolio company triggers a distribution of cash to LPs, but broad swaths of LPs, including university endowments, have seen lower-than-expected distributions from their private equity investments since 2022, Preqin noted in its 2025 institutional allocation study released earlier this year.

Pensions are now factoring lower distributions into their private equity pacing models, which keeps allocations on target by anticipating future flows of capital into and out of the private equity segment of their portfolios.

"That's leading [pensions] to deploy less. Your budget has to go down because you're not expecting to get money back," said John Haggerty, a managing principal and director of private market investments for Meketa Investment Group Inc., an adviser to pension funds and other private equity LPs.

Denominator effect

A public market correction earlier this year increased pressure on pension fund portfolios.

Broad declines in public equity valuations increased the risk of a denominator effect, which occurs when public market assets lose value faster than private market assets, Preqin noted in its first-quarter update on the private equity market. For pensions and other LPs already at or above their target private equity allocation, the denominator effect would push them further into overallocation territory by increasing the relative value of the private equity holdings in their portfolio.

– Read about pension funds with the largest overallocations to private equity in the first quarter. – Catch up on tariffs' impact on the PE exit outlook. – Scan the latest private equity headlines.

The S&P 500, which on April 8 was down more than 15% for the year, subsequently recovered, re-entering positive territory on May 13. However, a prolonged tariff spat between the US and China could send markets down again and reinvigorate the denominator effect, said Paul Spendiff, head of business development in Europe for Gen II Fund Services, LLC, a PE fund administrator.

"The problem is these waves of uncertainty delaying decision-making, delaying investment," Spendiff said.

Outlook

Blackstone Inc. President and COO Jonathan Gray acknowledged the same dynamic in April on the firm's first-quarter earnings call.

"You may see a little bit of a slowdown in decision-making, there may be a little bit of a denominator effect, but the overall bias is towards more alternatives," Gray said, referring to fundraising prospects among its large, North American LPs, including pension funds.

Pensions are among the most seasoned private equity investors and have been through previous down cycles for PE, added Bart Molloy, a partner at Monument Group Inc., a placement agent connecting LPs and private equity funds.

"Go back to the aftermath of [the Global Financial Crisis in] 2008, where there were a couple of good vintage years where some people stayed on the sidelines, they recognized in retrospect, a little too long," Molloy said.

"What we're seeing with pensions and, of course, with their consultants and their gatekeepers, is still a real commitment to trying to be as consistent as they can in vintage year diversification."