Key Takeaways
- Pension funds face liquidity issues due to stalled private-equity payouts.
- Managers resort to borrowing and selling assets at discounts to meet obligations.
- High-interest rates complicate private-equity exits, prolonging investment lock-ups.
What Happened?
Pension funds once thrived on private-equity investments, promising high returns and consistent payouts. However, the scenario has changed. Private-equity payouts have slowed, causing a cash crunch for pension managers who oversee the savings of retirees from major corporations and government entities. California’s largest pension fund will pay more into private equity than it receives for eight consecutive years.
Cummins faced a 4.4% loss in its U.K. pension due to selling private assets at a discount. U.S. companies and state governments manage about $5 trillion in pension money, with large public pension funds having an average of 14% in private equity. The slowdown in cash distributions has left many investments in so-called “zombie funds,” where assets are tied up longer than expected.
Why It Matters?
This liquidity issue is significant because it affects the ability of pension funds to meet their obligations to retirees. Managers are forced to sell assets at a discount or borrow money, both of which erode returns. High-interest rates have made buying and owning companies more complicated, slowing down private-equity sales.
Nearly half of private-equity investors have money stuck in zombie funds, according to a Coller Capital survey. This problem is not just a financial strain but also a risk to the stability of retirement funds, which impacts millions of retirees relying on these funds for their livelihood.
What’s Next?
Expect pension funds to continue selling private-equity stakes on the secondary market, often at a loss. Last year, secondary-market buyers paid an average of 85% of the assets’ assigned value. Pension funds like Kaiser Permanente plan to sell billions in private assets. California’s pension funds have approved borrowing plans to access cash.
This trend of borrowing and selling at discounts may persist as high-interest rates complicate private-equity exits. Investors should monitor how pension funds manage this cash crunch and its impact on overall returns. Potential shifts in asset allocation, such as reducing real estate and cash holdings, may also occur as funds seek liquidity.
