Private equity losses loom for pension plans

Grim results expected in yet another sign of how there is virtually no reprieve in the current market turmoil

Private equity losses loom for pension plans

Public pension funds have already been hit with substantial losses in 2022. And things are probably going to get worse following a reckoning in a complicated corner of the global investing scene.

According to the Wall Street Journal, those funds in the U.S. have yet to consider the second quarter returns on private equity and other illiquid investments. The funds oversee US$5 trillion in retirement savings for the country's teachers, firefighters, and other public employees.

In a statement made last month to the board of the US$300-billion California State Teachers' Retirement System, Allan Emkin, a consultant to large pension funds with Meketa Investment Group, said: “You should expect sometime over the next three to four quarters to see write-downs in the illiquid part of the portfolio.”

The losses are a further illustration of how there is almost nowhere to hide in the current market turmoil, and that even the investments that are typically regarded as safe havens are losing value.

Read more: Lack of transparency likely a dealbreaker for private equity investors

On Friday, the Dow Jones Industrial Average reached its lowest point since 2022 over worries about inflation, weak global growth, and whether the Federal Reserve's rate-hiking program will push the United States into a recession.

For many years, public pensions have struggled with funding. Over the past few years, more people have looked to private equity and other unconventional investments to fill their inconsistencies.

Public pension funds will determine the second-quarter performance of their private-market assets over the next weeks and months as they receive estimates from investment managers. The secondary market, where investors can buy and sell private equity assets halfway through the investments' lives, is already showing warning signs.

Based on information gathered from transactions that it worked on, investment bank Jefferies LLC found investors who purchased private equity assets on the secondary market this year paid, on average, 86% of the value assigned to those assets in 2021. It's common for assets to trade at a discount in secondary markets, but this was the lowest amount recorded since data collection started in 2016.

Read more: Time to brace for a selling spree of private-market fund stakes?

The most significant declines in private equity prices were reported by Jefferies in portfolios that included debt or equity from struggling businesses. Least affected were those that housed businesses involved in real estate, with industrial and infrastructure properties in high demand.

Analysts stated that a high supply also likely lowered secondary market prices.

To invest in private equity, institutions typically hand over cash to a money manager who then pools it with the money of other investors and uses it to buy, renovate, and sell private companies over the course of about ten years.

Even though the investor may get some money during that time, the full picture of the investment's success won't be known until the last payout.