US pensions upping PE exposure

The US’ largest institutional investors are committing more to private equity but overall fundraising won’t increase until GPs start using their dry powder, according to a Bain & Co study.

The average target allocation to private equity of US pension funds has risen to 8.3 percent in January, up from 7.5 percent in January 2012, said a study from Bain & Co.

The increase was even larger among the biggest pension funds. Since last year pension funds with total assets over $5 billion have increased their target allocation nearly 1.5 percent, to 9.7 percent from 8.3 percent.

The study used capital commitments of The Los Angeles County Employees Retirement Association (LACERA) as an example of increasing LP commitment to the asset class. LACERA’s target allocation had been set at 7 percent for many years but its actual allocation had risen to more than 10 percent of its $38.6 billion portfolio. The pension plan then reset its private equity target allocation to 11 percent this year, which has given it room to open up new commitments with Lightyear Capital and Europa Capital, according to the study.

The study puts the trend of increased target commitments down to recently rising public equity market valuations, which has expanded pensions' overall portfolio values. As a result, LPs have taken advantage of the denominator effect by increasing their private equity numerator. 

The study said that the combination of expanding asset bases and higher private equity commitments could create an additional $12 billion for GPs to fight over in the next few years.

However the study noted fundraising may remain at current levels until deal activity and realizations become more prevalent. In other words, LPs will only commit more after being convinced that GPs are using dry powder currently in existence, according to Bain’s analysis.