Pension allocators are one of the larger investors in private equity, and the allocations are expected to increase. Let’s start with where the largest pension capital pools are. The five largest pools of pension assets in the world – the United States, United Kingdom, Canada, Australia and the Netherlands account for over 85% of global pension assets per OECD.
The Top 5 Pension Pools
US is #1 – 67.3%
The US is home to over 300 government sponsored pension plans and a large number of corporate defined benefit (DB) and defined contribution (401k) plans. Both public and corporate DB plans have been allocators to private markets, however the asset allocation to this asset class widely varies across the plans. CalPERS and CalSTRS are the largest allocators to private markets.
Additionally, the introduction of private equity in 401k plans is now possible, but is expected to be measured in the short term.
UK is #2 – 6.3%
In addition to corporate and industry defined benefits and defined contribution plans, the UK also has a local government pension scheme (LGPS) which is a national pension scheme for over 6.39 million people. The LGPS is administered locally by 86 local pension funds for over 18,000 employers and has assets of £369bn.
At a July 2023 Mansion House speech, UK chancellor Jeremy Hunt has announced reforms for the LGPS which includes (1) consolidation plans for LGPS Pools by setting minimum asset size for LGPS Pools to £50bn to achieve economies of scale, and (2) a push to double private equity allocations to 10%
Canada is #3 – 5.4%
While Canada has over 20 government sponsored pension plans, Canada’s Maple 8 — the country’s largest eight public pension plans that manage a total of about $2 trillion in assets. Canadian pension plans have been active institutional investors in unlisted and private assets.
Australia is #4 – 3.9%
Australian Superannuation are financial institutions that offer Super Funds. Super funds are retirement funds, and the Australian super industry has about $3.4 trillion in assets under management. This industry is also undergoing structural changes with ongoing consolidations between the funds. The largest funds which include Australian Super, Australian Retirement Trust, Aware Super, Cbus Super account for nearly 70% of superannuation assets.
Netherlands is #5 – 3.5%
The Dutch pension market has been largely dominated by defined benefit structures. Recent pension reform will enable a shift of the Dutch private pension system more towards defined contribution.
The state of private equity investing in pension allocators
With the forward view of the world, there’s momentum for the addition of private markets in pension portfolios for both diversification and return enhancement. However, private markets investing requires a focus on internal talent and expertise along with a sophisticated diligence framework to assess and manage the risk factors associated with the asset class.
U.S. public pension plans had 11% of their assets invested in private equity according to the American Investment Council’s 2022 Public Pension Study.
However, as per S&P Global Market Intelligence, among 365 global pension funds, the median allocation to private equity was ~1.5% lower than median target allocation, which indicates the need to bridge the gap.
While pension plans globally adjust their private markets allocations – in response to market conditions, industry structural changes (ongoing consolidations in Australia and expected in UK LGPS), or respond to reforms (increased allocation by 5% for UK LGPS or shift from DB to DC for the Dutch markets), the risk frameworks are shifting. As a result, due diligence of the assets and ongoing monitoring takes center stage when the industry is in transition. Some LPs are prioritizing secondary sales, while others are adding to the exposure.
GPs have to navigate this environment of tough fundraising dynamics with lower future asset return expectations, along with the changing industry microstructure. To create a competitive advantage, our GP clients are focused on strengthening their investor relations strategy – using technology to create a knowledge advantage, along with a responsive diligence and reporting framework to enhance the investor experience.
At DiligenceVault we also have public and corporate pension plan clients in these countries in the top 5 regions. Their clients’ investment, operational due diligence and ESG teams use our technology to conduct thorough diligence on their external managers and their portfolio companies before and during investment.
As the pension industry is in transition and is also changing how they allocate to private markets opportunities , we have seen our global user industry exchange as a great resource for our clients to discuss their approaches and how their investment and diligence frameworks are transforming.
LPs and GPs interested in joining the dialogue or to understand how our technology can help you assess the risk and opportunities in 2023 and beyond, please reach out!
