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Pension fund allocation to private equity under target in 2023


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Pension fund allocation to private equity under target in 2023

Global pension funds ended the first quarter slightly underallocated to private equity compared to their targets, an indicator of the challenging investment environment.

Across 365 global pension funds, the median target allocation was $280 million and the median actual allocation was $276 million, suggesting that in aggregate, pension funds have a $4 million net underallocation to private equity as of March 28, according to S&P Global Market Intelligence and Preqin.

California Public Employees' Retirement System (CalPERS) had the largest underallocation, falling $11.34 billion short of the target, likely a result of a recent target increase to private equity.

"Private equity is the highest performing asset class in the CalPERS portfolio and its allocation was increased from 8% to 13% starting with the 2022-23 fiscal year," CalPERS said in a January statement.

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SNL Image Click here to download the associated Excel file with actual versus target allocation.
Read more about the appeal of private credit here.
Read some of the day's top private equity news and insights from S&P Global Market Intelligence.

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Top allocators

The global pension funds analyzed represented a wide variation in allocations to private equity. In terms of actual allocations to private equity, the two California pension funds California State Teachers' Retirement System and CalPERS had the largest amounts at $46.73 billion and $46.26 billion, respectively.

The lowest actual allocation was $1 million from Burlington Employees' Retirement System.

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Institutional capital forecast to slow

A variety of factors account for the aggregate underallocation, including a sharp drop in private equity and venture capital funds launched in the year to April 3.

During the period, 30 funds with a size greater than $100 million were launched, compared to 450 during the same period in 2022, according to Market Intelligence and Preqin Pro data.

Investor hesitancy due to the uncertain direction of inflation and interest rates and the denominator effect, which found some institutional investors overexposed to private equity as public markets fell, are also likely factors.

Whether the slight underallocation represents a temporary adjustment to the current investment environment or the beginning of an allocation reassessment remains to be seen.

Rising interest rates have given bonds increasingly attractive yields, while a slowdown in bank loans, particularly as bank regulators are likely to tighten the rules after the collapse of Silicon Valley Bank, has boosted the investment appeal of private credit funds.

Preqin forecast a dramatic fall in institutional global private capital fundraising to a 3.57% compound annual growth rate from 2022 to 2027, compared to the 11.70% CAGR recorded between 2015 and 2021.

The decrease in institutional investor allocations is expected to be offset by the rise in private wealth from individual retail investors, which Preqin calls "the new frontier of alternative assets fundraising."