Private Equity and Public Pensions: What’s the Return?

Private equity is on the prowl for new sources of funding and workers’ personal retirement retirement savings are in the cross hairs. In the first Trump administration, the Department of Labor approved including private equity in workers’ IRAs and 401(k)s.under certain circumstances. Take up was disappointing. In Trump 2.0, PE expects more leeway in what it can offer. It is developing Exchange Traded Funds that would include investments in private assets and the industry is optimistic that these will be approved for inclusion in people’s personal retirement savings.

Attracting traditional private equity investors to continue funding the industry is proving difficult. Fundraising by private equity hit a seven year low in the first quarter of 2025, $22 billion below the comparable figure for the same period last year. The problem is that PE investors have faced three years of reduced payouts, with PE cashing out and returning only half the typical value of investments in 2024 compared to what they typically sell. This is a drop of $400 billion below what investors were expecting in returns .

With a Trump administration that looks favorably on private investment funds, PE firms have again set their sights on workers’ retirement savings – their IRAs and 401(k) accounts – that hold an estimated $12 trillion (yes trillion with a t). Currently, these savings are mostly off-limits to PE firms, because they are riskier, come with higher fees, and are more illiquid than stocks and bonds. The Department of Labor limits PE’s ability to shove their products into these retirement accounts because they are not compatible with workers’ requirements, including the ability to tap their retirement funds as needed. But that may change in the second Trump administration with a more compliant Congress amenable to passing laws to facilitate investment of these retirement funds in private equity.

The private equity industry argues that these investments will provide more diversification, access to the thousands of companies held in PE portfolios, and a chance to earn higher returns. After all, pension funds have invested billions of dollars of retirement savings of millions of workers in private equity funds for decades in pursuit of higher returns. Why shouldn’t workers with IRAs and 401(k)s have the same opportunity?

So, how have those pension funds fared?

PitchBook’s Pension Fund Tracker has the answer: “The top pensions in the country returned a 7.4% return average over the past decade.” That’s what the 50 largest pension funds in the U.S. earned over a 10-year period ending June 30, 2024.

And how did a plain vanilla portfolio of 60% stocks and 40% bonds do over the same period? It returned 8.1%, handily beating these large pension funds. The California Public Employees’ Retirement System (CalPERS), the largest in the country with $502.9 billion in assets under management, saw a 6.2 percent return over the 10 years ending June 30 of last year.

A diversified portfolio that includes large allocations to private equity has not boosted the retirement savings of workers in these pension funds.

This is not surprising. A similar analysis of the 50 largest university endowmentsshowed the same lesson. These endowments are heavily invested in private equity and other private assets, whose disappointing returns failed to beat a plain vanilla portfolio of 60% stock and 40% bonds over a 10-year period

The message is clear – private equity does not belong in the retirement savings of workers. Investing in PE increases the risk, but it does not boost the returns for people saving for their old age.

This first appeared on CERP.

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