Pension investment in private equity refers to an important component of the Endowment Model (also referred to as The Yale Model, credited to
David Swensen and Dean Takahashi), pension funds may invest directly in private companies, or indirectly via private equity funds. This is a departure of the classic "70-30 Model" where a pension fund would invest 30% of its assets in publicly-listed stock. The perceived benefits of investing in private companies include the improved ability to diversify by region, industry, and sector, in addition to being able to invest in a greater selection of companies (including privately held companies, not listed on a stock exchange). A perceived drawback is the lack of liquidity of such private investments.
Pension investment key to the development of the asset class
Pension investment in
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
started in the United States and Canada in the late-1970s, an era of high inflation and mediocre performance for most listed equity markets, when large institutional investors began to
diversify into “non-traditional”
asset class
In finance, an asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those havin ...
es such as private equity and
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
.
The trend towards increased allocation to private equity including venture capital accelerated after 2009–2010. At the start of the
Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
, European and Canadian
financial economics
Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade". William F. Sharpe"Financia ...
experts notably from the
World Pensions Council estimated that:
Perceived benefits and substitution effect with listed equity
The traditional drivers of pension investment in private equity include statistical diversification stemming from partial decorrelation to listed securities (‘listed equity’ i.e. stocks and also bonds), expectation of superior risk-adjusted returns over long periods (typically 8 to 10 years), access to early-stage industries and
fiscal
Fiscal usually refers to government finance. In this context, it may refer to:
Economics
* Fiscal policy, use of government expenditure to influence economic development
* Fiscal policy debate
* Fiscal adjustment, a reduction in the government ...
incentive
In general, incentives are anything that persuade a person to alter their behaviour. It is emphasised that incentives matter by the basic law of economists and the laws of behaviour, which state that higher incentives amount to greater levels of ...
s for investments in
SMEs and/or innovative technologies.
Research conducted by the
London Business School
London Business School (LBS) is a business school and a constituent college of the federal University of London. LBS was founded in 1964 and awards post-graduate degrees (Master's degrees in management and finance, MBA and PhD). Its motto is " ...
Coller Institute of Private Equity (CIPE) suggests that for most pension investors “''private equity and publicly-listed stocks are viewed as''
..''substitute''
..
here is
Here is an adverb that means "in, on, or at this place". It may also refer to:
Software
* Here Technologies, a mapping company
* Here WeGo (formerly Here Maps), a mobile app and map website by Here
Television
* Here TV (formerly "here!"), a TV ...
''a strong negative relationship between quoted equity and private equity allocations''”.
Long-dated liabilities allowing longer holding periods
Large pension funds typically have long-dated liabilities (longer than those of other institutional investors such as banks or insurance companies). They have a generally lower likelihood of facing liquidity shocks in the medium term and thus can afford the long holding periods required by private equity investment.
[M. Nicolas J. Firzli ]
‘The New Drivers of Pension Investment in Private Equity’, Revue Analyse Financière, Q3 2014 – Issue N°52
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References
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Pensions
Sovereign wealth funds
Private equity
Equity securities