Fan Favorites: The Alternative Investment “People’s Choice Awards”

Special to by: Steve Deutsch, CAIA, Editorial Board.

Private equity has suffered a bit of a black eye lately as returns and fund raising remain in the doldrums.  But according to a February 2011 report by research firm Preqin, a little perspective might help.  The firm looked at the financial statements of 150 major public pension plans in North America, Europe, and the U.K, and made a number of interesting observations about the returns of alternative investment portfolios, about the most successful pension funds and about the leading alternative investment managers themselves.  It turns out, for example, that private equity has panned out pretty well for these pension plans.

The report borrows a page from the playbook of Hollywood’s “People’s Choice Awards.”  Pop culture aficionados know that these awards are designed preempt the Academy Awards by recognizing fan opinions, but not necessarily quality.  In other words, it’s a popularity contest.

After pouring over financial statements, Preqin assembled a list of the most popular hedge funds, private equity funds, infrastructure funds and real estate funds among the population of 150 pension plans.

And the winners are…

  • The greatest number of U.S. public pensions, 84, have invested with Pramerica Real Estate Investors, the real estate investment management business of Prudential Financial of the United States.  (Honorable mentions go to JP Morgan and UBS.)
  • The most popular private equity fund manager was Blackstone Group,  favored by some 61 public pension plan investors. (Honorable mentions awarded to Oaktree and TA Associates.)

Perhaps it is not too surprisingly, a “traditional” alternative asset class (real estate) and the prototypical private equity asset manager (Blackstone) won with lots of votes.  There was less herding among hedge fund and infrastructure investors however, perhaps because there are more hedge funds to choose from and fewer pension plans invested directly in infrastructure…

  • For hedge funds, Bridgewater obtained the most number of allocations at 21 (Honorable mentions: K2, Grosvenor); and,
  • In the infrastructure category – clearly still an outlier asset class with U.S. public pension plans – Alinda Capital Partners attracted a class-leading 6 investors (Honorable mention: Energy Capital).

So how did poor old private equity do?  Amazingly, Preqin also found that that “[p]rivate equity and fixed income are the only investment types to have generated positive horizon returns across the one, three, five and ten year periods as of Q2 2010.”

Of course, the distortion of the black swan 2008-2009 credit crisis is a factor in the results – but the conclusion is still striking.  Excluding fixed income, private equity returns have indeed remained above zero for the 1, 3, 5 and ten years time periods. (See chart below.)

Not even hedge funds have pulled off a feat like that, although a slight shift in the time windows analyzed might nudge the hedgies over the private equity managers in the 3 year category.

Despite investing in many of the same funds, the 150 public pension plans turned in very different returns across each asset class.  In fact, the relationship between 5-year performance and allocations to alternatives appears to be weak.  As you can see in the chart below from the report, the top eleven performers had private equity allocations that ranged from 0.03% to 24.9% and real estate allocations that ranged from 3% to 10.7%.   Most did not even report any allocations to infrastructure or hedge funds.

Given this, along with Figure 1 (above), it’s a safe bet that these “top performers” achieved success through fixed income allocations.

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