Key Takeaways:
- Pension funds face cash shortages due to illiquid private equity investments.
- High interest rates and economic shifts complicate the sale of private equity assets.
- Managers resort to borrowing or secondhand sales, impacting returns.
What Happened?
Private equity and pension funds once promised high returns, but recent economic conditions have turned this relationship sour. U.S. companies and states, managing around $5 trillion in pension money, now face cash shortages. Large public pension funds hold an average of 14% in private equity, while corporate pensions have nearly 13%.
California’s worker pension will pay more into private equity than it receives for eight consecutive years. Cummins took a 4.4% loss in its U.K. pension because it sold assets at a discount. Secondary-market buyers paid an average of 85% of asset value last year, and secondhand sales rose 7% to $60 billion.
Why It Matters?
These cash shortages force pension funds to take drastic measures, like selling investments at a loss or borrowing, which erodes returns. High interest rates and economic uncertainty make it difficult for private-equity managers to sell assets, locking up worker retirement savings longer than promised.
Allen Waldrop, Alaska Permanent Fund Corp. private-equity director, said, “You’ve got a lot more money out and going out than is coming back, and I think that’s causing a lot of angst.”
What’s Next?
Expect pension funds to continue selling private-equity stakes on the secondary market, often at a loss. Borrowing to meet cash demands may become more common, further impacting returns.
Anton Orlich of California Public Employees’ Retirement System predicts cash demands will outstrip payouts for another four years. Investors should monitor how pension funds navigate these challenges, as their strategies will likely affect broader market dynamics and retirement security.
