A Pension Fund Finds New Opportunities in Private Equity

As a limited partner, PensionFundCo* had historically invested in areas ranging from public equities to real estate to assets uniquely linked to the region in which its contributors work and live. In the five years prior to engaging us, PensionFundCo had on average invested only about 5% of its capital in private equity markets. Its board was skeptical that increasing that outlay would produce meaningful results. In fact, its pace of PE investment had been slowing.

We showed them why a stronger investment in private equity could, if approached properly, achieve the results they sought. To begin, we gave PensionFundCo a sharper view of the market than it had ever had. Using our superior benchmarking data, we measured PensionFundCo against comparable funds; we analyzed what its peers were allocating to private equity, the returns they were getting, and the key factors for success. Our analysis demonstrated that, for PensionFundCo to realize consistent returns from private equity, it needed to scale up its investments and define a strategy to differentiate itself.

Backed by our deep experience with institutional investors, we then mapped out the full universe of options across three dimensions (geography, asset class, and participation model), evaluating each option against two top priorities: attractiveness (i.e., offering attractive returns and enabling significant funding to be put to work) and alignment with PensionFundCo’s current capabilities.

This research helped us lay out a detailed strategy, which prioritized investment options based on PensionFundCo’s current portfolio and its ability to win in each type of participation model. We showed its leaders where and how they could win, identifying sources of unique advantage in getting the best opportunities.

Following our recommendations, PensionFundCo decided to nearly triple its PE allocations, targeting midmarket limited partnerships. Its bespoke strategy, which combined the use of funds, coinvestments, and secondaries, would allow it to work more effectively with general partners.

To prepare PensionFundCo for this shift, we examined the fund’s operating model and explored the different demands its strategy shift would place on the organization. Working collaboratively with its leadership team, we identified the capabilities PensionFundCo would need to add or enhance. We advised them on team design and internal governance requirements, and gave them a set of choices to make about their operating model, based on the cost and returns over time.

These changes have enabled PensionFundCo to invest in private equity at a scale that allows for more continuous redeployment of capital. Its new commitment pacing model helps leaders anticipate future cash flows to and from their PE investments. As a result, the fund has raised its PE allocation to more than 10% of its cumulative net cash flow and asset value as a percentage of total fund value. The positive results have supported the fund’s ability to balance liquidity and growth and better serve its contributors today, tomorrow, and far into the future.