Public Plans’ Allocation Shortfalls to Private Markets Highlights New Fundraising Opportunities for GPs

September 4th, 2019

by Cameron Nicol, Senior Marketing Manager – eVestment Private Markets

A study by eVestment of U.S. public pension plans’ current vs. target asset allocations, released in August 2019, identified significant under allocations to private markets strategies and consequently an abundance of opportunities for the fund managers able to identify and capitalize on them.

The study, featured in industry publications such as PEI and FundFire, analyzed data from 163 public plans and those with portfolio information dated between March 31, 2018 and March 31, 2019. Overall, the findings highlighted that this under-allocation to private markets is not restricted to a handful of public pension funds, but is widespread.

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Strong Appetite for Private Markets Expected to Continue

Out of the 102 plans with separable Private Markets investment allocations, 70 were under-allocated overall (figure 1). Shortfalls were most pronounced in the Real Estate bucket ($25.50 billion), followed by Private Equity ($19.03 billion) then Private Debt ($9.89 billion), projecting significant inflows to these strategies as public plans work towards meeting their target allocations.

These shortfalls are primarily driven by plans’ decisions to increase their policy allocations to Private Markets. Record performance from strategies in recent years has likely attracted investors looking to make up funding gaps: in the five-year period ending 2018, $2 trillion of capital was distributed back to Private Equity fund investors, the largest five-year total on record (Bain, 2019). One of the most notable allocation increases was demonstrated by the CIO of CalPERS’s earlier this year, making the case to double their target from 8% to 16%.

Figure 1. Public Plan Allocations vs. Policy

Figure 2. Public Plan Allocations vs. Policy By Size

Small Plans Play Catch-up on Achieving Target Allocations

For Private Equity allocations, the report finds smaller plans (those with less than $10 billion in assets) have more modest aspirations with an average target of 8.31% of total portfolios. This compares to an average target of 10.51% for plans with more than $10 billion in assets. Yet even despite their more restrained aspirations, these smaller plans currently have a large average shortfall in their Private Equity allocation that their large plan counterparts. Shortfalls averaged -1.80% for small plans vs. -0.43% for large plans, suggesting differences in implementation sizing/timing or challenges in investment sourcing dependent on plan size.

In general, the study found that smaller plans showed greater Private Markets shortfalls than large plans, in percentage terms (figure 2).

The full report, available now, explores the average allocations and allocation shortfalls by plan size across Private Equity, Private Debt and Real Estate strategies. Download it now to gain more insights into the asset allocation trends and practices of U.S. public pension plans.

2019 Asset Allocation Trends

Find out which asset classes will be the biggest winners and losers from U.S. public plans shifting asset allocation trends.

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