‘Low risk’ alternatives for public pensions?

February 23, 2011, 12:47 AM UTC

Private equity generally is considered to be “high-risk,” which is why public pension funds tend to limit their exposure to 10% or less (sometimes higher, depending on whether or not the system considers private equity to also include venture capital). But new data suggests that such deals actually have produced some of the most consistent returns for public pensions over the past decade.

Research firm Preqin examined financial statements from 150 public pensions in North America and Europe, though the end of Q2 2010. It founds that only private equity and fixed income produced positive horizon returns for the 1-year, 3-year, 5-year and 10-year time periods. All other classes were in the red for at least one of those periods.

So it’s not surprising that Preqin also found above-average allocations to private equity among the best-performing pension systems in its sample (based on performance over past 5 years). The typical system had a 5.5% allocation to private equity, but top overall performer Omaha School Employees’ Retirement System had a 17.9% allocation to the asset class.

In fact, nine of the top ten overall performers were above the 5.5% mark. The only exception was second-placer El Paso Fireman & Policeman’s Pension, whose PE allocation was at a paltry 0.03%. Here’s the full chart:

Source: Preqin