Private equity for pension plans? Evaluating private equity performance from an investor’s perspective

Abstract

We evaluate private equity (PE) performance using investor-specific stochastic discount factors, and examine whether public pension plans could benefit from changing their allocation to PE. Plans invest in PE funds with higher than average risk-adjusted performance. This is mainly due to access to successful managers, not superior selection skill. Decomposing returns into risk-compensation and “alpha”, we find that some plans obtain higher PE returns by taking more risk without earning higher, and in some cases earning lower, risk-adjusted returns, broadly consistent with agency problems within plans.