Why IPERS Embraced Its Rising Private Equity Allocation

When the Iowa Public Employees’ Retirement System found itself with more private equity than it bargained for after the value of its stocks and bonds fell, the board had a decision to make: sell some to get back in line with its policy or intentionally increase its PE investments. 

In late September, the board voted to increase the system’s target allocations to private equity from 13 percent to 17 percent. It also upped its private real assets by 1 percentage point. This is the second time in the past three years that IPERS has increased its PE target. In 2020, the $40.13 billion trust fund rose its allocation from 11 percent to 13 percent. 

Now private equity represents about 21 percent of the fund’s total portfolio, according to Sriram Lakshminarayanan, CIO of IPERS. The inflated allocation is largely a result of the denominator effect — jargon referring to how allocations to different types of investments can get out of whack when public securities like stocks fall more than private assets, which are marked only quarterly.

“You are seeing this across every public fund or [with] any institutional owner who is invested in private equity,” Lakshminarayanan said. “Targets are just targets.” Both the board and investment staff then need to figure out a way to navigate the mismatch, he said. 

Lakshminarayanan said public funds have three options. First, they can scramble to decrease their private equity investments by selling their holdings on the secondary market, and invest the proceeds in public markets. They also can gradually commit less of their portfolio to PE until their allocation comes back down to their target.

The third option is to step back and ask how much private equity the portfolio needs and can take. This is the question that the investment staff posed to the board last month. In that session, the board listened to a list of the pros and cons of adding more illiquidity (in the form of private equity investments) into the portfolio. At the end, the board felt comfortable increasing the PE target. 

While investments in private equity have historically yielded higher returns, the pension still recognizes that they also require investors to take on outsized market and liquidity risks. Lakshminarayanan said the fund doesn’t see the private markets as a safe haven from the turmoil in the public markets, nor as an uncorrelated asset class. “We are fully aware of the additional risk that comes along with investing in private markets,” he said, “but we are also cognizant of the additional returns that it might come along with.” 

Lakshminarayanan views private equity as a mature asset class that relies on a rigorous process. 

“As with every asset class, there are good investments; there are mediocre investments; and there are bad investments. Private equity is no different,” he said.