Pension Board Composition Affects PE Returns: Study

A recent study examined how the composition of 210 public pension boards affected private equity investment performance.

It found that boards with the most state-appointed and/or elected members performed the worst, either because of poor manager selection or category allocation.

Ai-Cio.com summarized the results:

From a study of 210 US public pension funds with more than 13,000 private equity investments from 1990 to 2011, the authors found funds with boards heavily made up of elected officials or members appointed by state representatives underperformed the worst.

Specifically, state-appointed board members were linked to the lowest performance, with a 10-percentage point increase in the proportion of such members resulting in about a 0.9 percentage point drop in annual net internal rate of return (IRR).

And ex officio board members followed suit, with a 10-percentage point rise in their representation leading to a drop in annual net IRR of between 0.53 and 0.67 percentage points.

“This underperformance is related both to investment category allocation and to selection of managers within category,” Antonov, Hochberg, and Rauh continued.

The research revealed funds whose boards housed more state officials and elected plan participants invested more in real estate and fund-of-funds.

These poorly governed funds were also “strongly correlated” with poor investment decisions in private equity including overweighting in small and in-state funds, as well as allocating to inexperienced general partners.

Read the study here.

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