The equation between managing active workers' contributions to fund retirees' pensions is proving increasingly difficult to resolve. On the one hand, historically low interest rates over the past decade have reduced returns on bonds, which traditionally make up a large proportion of portfolios. On the other, stock market volatility is increasing the risks on listed assets.
Against this backdrop of growing tensions between returns and stability, private equity, which targets unlisted companies, presents itself as a solution. For pension funds, private equity represents a response to the structural challenges they face, while at the same time enabling portfolio diversification. This strategy is based on a strong conviction: the long-term performance of these investments more than compensates for their challenges, notably their low liquidity.
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Long-term vision makes private equity attractive
Private equity stands out from other asset classes for its ability to generate annualized returns often in excess of 10% net, well above those of traditional assets. These attractive returns are mainly due to three factors: direct value creation, decorrelation from listed markets and a long-term vision.
In addition to investing in companies, private equity managers are directly involved in their strategies, and sometimes even in their day-to-day management. They restructure them to improve management and stimulate growth in order to create value. This involves optimizing costs and developing new markets7.
This direct value creation, uncorrelated with listed markets, limits exposure to the day-to-day fluctuations of the stock markets and thus ensures a degree of stability. In this way, private equity offers a long-term vision, established over several years, in contrast to the way public markets operate.
Private equity, a growth driver for US funds
Last year, CalPERS, one of America's leading public pension funds, announced a 4% increase in its private equity investments. The firm, which began investing in private equity in the 1990s, was devoting 16.1%8 of its portfolio to it by the end of 2024, with the aim of eventually reaching 17%9.
David Miller, member of the Board of Directors and Director of the CalPERS Investment Committee, explains 10: "Market conditions are changing. The investment team needs the flexibility to invest capital intelligently to keep the fund on track for sustainable returns. Sustained growth in private equity returns is behind this measured and appropriate increase".
This strategy is based on a simple observation: private equity's historical returns outperform those of other asset classes. Between 2012 and 2022, CalPERS' private equity portfolio generated an average net return of 13.9% 11.
TIAA launches its own private equity fund
TIAA, which manages the pensions of over three million teachers and researchers, is also focusing on private equity. Last June, it launched TIAA Ventures, an investment program dedicated to Private Equity 12.
"TIAA Ventures enables us to invest in innovative concepts and products that can ultimately create safer and more secure prospects for all retirees, whether they are close to retirement or have already retired," says Wayne Baker, Investment Director of TIAA Ventures.
TIAA sets itself apart with an approach that focuses solely on strategic sectors, such as information technology and healthcare. These targeted yet diversified investments enable us to support companies with solid growth potential, thereby minimizing risk.
A notable example is TIAA's investment in Blackstone Energy Partners, a private equity fund that finances companies developing clean technologies and energy infrastructure. An investment that not only generates competitive returns, but also contributes to broader societal goals.
The challenges of Private Equity...
The integration of private equity into pension fund portfolios is not without debate. The capital invested is generally locked in for a period of 7 to 10 years, which can pose a problem in the event of an urgent need for liquidity.
There is also an operational risk, in the case of a turnaround strategy. This is due to the success of investments, which depends on the fund's ability to select the most promising companies and execute effective transformation strategies.
The management costs associated with private equity funds are also often cited as being higher than those of traditional assets. This is because, by going beyond the simple acquisition and disposal of assets, private equity requires more management.
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In 2020, CalPERS came under fire for underestimating its private equity management fees, which can be as high as 2% of assets under management and 20% of earnings14. In response, the fund has adopted a more selective approach, investing directly in companies rather than through third-party managers. This disintermediation strategy reduces costs and therefore increases net returns.
...do not hinder its expansion
Despite these challenges, large pension funds continue to increase their private equity allocations. According to an Amundi report published in December 2024, 86% 15 of them expect to be invested in private equity over the next 3 years, and 55% 16 of them plan to increase their exposure to this asset class.
The growing role of private equity reflects growing confidence in its ability to meet the financial and demographic challenges of the US pension system. Funds are looking to private equity to balance and diversify their portfolios, while maximizing returns and meeting their obligations to retirees. Private equity is gradually positioning itself as a strategic partner for pension funds.
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CalPERS: "the largest public pension fund [in the United States]".
Founded in 1932, the California Public Employees' Retirement System (CalPERS) describes itself on its website as "the nation's largest public pension fund". This U.S. agency, part of California's public administration, manages over $502 billion in assets 17 and looks after the retirement funds of more than 2 million Californians 18. CalPERS has been investing in private equity since the 1990s, and today devotes around 17% of its total portfolio to the sector.
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TIAA: 96th in the Fortune 500
Founded in 1918, the Teachers Insurance and Annuity Association (TIAA) is an American insurance and investment company. It insures over 5 million active and retired employees and 15,000 institutions 19, mainly educational and medical 20. Its funds manage over $1,400 billion in assets 21 and invest in more than fifty countries. In 2024, it ranked 96th on the Fortune 500.
5. https://www.revue-banque.fr/metiers/gestion-d-actifs/les-fonds-de-pension-americains-geants-aux-pieds-d-argile-PA15266238
6. https://www.blackrock.com/corporate/literature/whitepaper/bii-global-outlook-2025.pdf
7. See article "Making pensions sustainable by transforming high-potential companies
8. https://www.privateequityinternational.com/recapturing-the-lost-decade/?utm
9. https://www.calpers.ca.gov/newsroom/calpers-news/2024/calpers-will-increase-private-markets-investments
10. https://www.calpers.ca.gov/page/newsroom/calpers-news/2024/calpers-will-increase-private-markets-investments
11. https://www.calpers.ca.gov/sites/default/files/spf/docs/board-agendas/202202/invest/item07a-01_a.pdf
12. https://www.tiaa.org/public/about-tiaa/news-press/news/2024/06-01
13. https://www.amf-france.org/sites/institutionnel/files/private/2023-09/230911-private-equity-etat-des-lieux-et-vulnerabilites-l.-grillet-aubert-fr_0.pdf
14. https://www.calpers.ca.gov/documents/201508-invest-item09a-01/download (page 5)
15. https://fr.media.amundi.com/actualites/les-fonds-de-pension-prets-a-augmenter-leur-allocation-en-faveur-des-actifs-prives-et-des-marches-emergents-asiatiques-81d6a-22f29.html
16. https://alternativecreditinvestor.com/2024/12/19/pension-funds-to-increase-private-market-allocations/
17. https://www.calpers.ca.gov/newsroom/calpers-news/2024/calpers-preliminary-investment-return-fiscal-year-2023-24
18. https://www.calpers.ca.gov/members
19. https://www.tiaa.org/public/pdf/lifetime_income_brochure.pdf
20. https://en.wikipedia.org/wiki/TIAA
21. https://www.tiaa.org/public/about-tiaa/news-press/press-releases/2024/12-11
22. https://fortune.com/ranking/fortune500/?Name=TIAA
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