A number of pension funds are lowering their return expectations for private equity at a time when officials are counting on the asset class to help their entire portfolios reach expected rates of return.

Return projections are falling, pushed down by a massive amount of capital flowing into the asset class — a sharp contrast to the double-digit returns investors once had been getting. Investors and their consultants now expect annualized returns in the high single digits over the long term. As a result, investors are cutting expected returns from the once-standard 300 basis points over the public equity markets and trying to determine how they will invest in private equity going forward.

Some investors have cut their return expectations by as much as in half in the past 12 to 18 months. Among them are the $372.8 billion California Public Employees’ Retirement System (CalPERS), $236.9 billion California State Teachers’ Retirement System (CalSTRS) and the $54 billion Los Angeles County Employees Retirement Association. All three have lowered the premium they expect private equity to deliver over the public markets and, in some cases, changed the index.

CalPERS and CalSTRS both cut their premiums to 1.5% from 3% over an equity index. CalPERS also changed the benchmark index to the FTSE Global All-Cap index from a custom blend of two other FTSE indexes. CalSTRS switched its index to the MSCI All Country World index from the Russell 3000. LACERA changed its private equity benchmark to a global public equity benchmark plus 200 basis points from a U.S. benchmark with a higher premium….

Read the whole article at P&I Online.

This article quotes selections from “Funds dial back expectations for returns” by Arleen Jacobius, in P&I Online, August 5, 2019.