{"id":230521,"date":"2026-06-28T21:31:08","date_gmt":"2026-06-28T21:31:08","guid":{"rendered":"https:\/\/www.newsbeep.com\/us-pa\/230521\/"},"modified":"2026-06-28T21:31:08","modified_gmt":"2026-06-28T21:31:08","slug":"amid-41b-shortfall-pennsylvania-teachers-pension-cites-private-equity-as-biggest-drag-state","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/us-pa\/230521\/","title":{"rendered":"Amid $41B shortfall, Pennsylvania teachers’ pension cites private equity as biggest drag | State"},"content":{"rendered":"

The Center Square \u2014\u00a0Pennsylvania’s public-school employees’ pension fund is $41 billion short of what it needs to pay promised benefits. Last year, it missed the investment benchmark that officials set, a result they said was “primarily due to performance within private equity<\/a>.”<\/p>\n

As of Dec. 31,\u00a0Pennsylvania\u2019s Public School Employees\u2019 Retirement System held $85.3 billion in assets, making it one of the nation’s largest public pension funds. PSERS invested $10.1 billion in private equity with a goal of earning a 10.06% return.\u00a0It returned just 2.59%.\u00a0According to PSERS, private equity reduced the fund’s overall return by 0.59 percentage points \u2014 more than any other asset class.\u00a0<\/p>\n

The $41 billion shortfall is more than an accounting figure.<\/p>\n

Pennsylvania taxpayers will ultimately bear much of the cost as the state spends more to keep its promises to the fund’s 500,000 members and their beneficiaries or survivors, said\u00a0Leonard Gilroy, senior managing director<\/a> of the pension integrity project for the Reason Foundation, a free market think tank.<\/p>\n

Private equity has put state officials in a bind, he added.<\/p>\n

\u201cFor most state pensions, they\u2019re not getting outsized returns; they\u2019re taking on a bunch of risk; and they pay fees to limited partners at private equity firms,\u201d he said in an interview. \u201cThat puts state officials in the position of either needing to invest more taxpayer funds or find better investments.\u201d\u00a0<\/p>\n

An investigation by The Center Square found that private equity was the only one of PSERS’ eight asset classes to miss its benchmarks over one-, three-, five-, 10- and 15-year periods.<\/p>\n

A record of underperformance<\/p>\n

PSERS officials declined\u00a0a request for an interview.<\/p>\n

Instead, Chief Investment Officer Ben Cotton\u00a0emailed a statement. He said the benchmark doesn’t precisely match its private equity portfolio because it has a different mix of investment strategies and older and newer funds than the benchmark.<\/p>\n

PSERS is “underweight in some strategies and newer vintages have outperformed over the most recent periods,” he wrote.<\/p>\n

Cotton’s explanation echoed comments from\u00a0PSERS\u2019 head of private markets\u00a0last year.\u00a0<\/p>\n

“Assets held for 10-plus years tend to have diminished return potential thereafter, often underperforming the portfolio’s cost of capital,\u201d James Del Gaudio told the trade publication<\/a> Markets Group.<\/p>\n

The possible end of a ‘golden era’<\/p>\n

Private equity invests in companies that aren’t publicly traded.\u00a0Pension funds have embraced the asset class. It had\u00a0outperformed stocks and bonds, although it charges higher fees and ties up investors’ money for years.<\/p>\n

That may be changing.<\/p>\n

PSERS has\u00a0pulled back from private equity. As of fiscal year 2024, it held $12.2 billion. By last December, that had fallen to $10.1 billion. Private equity’s share\u00a0of the portfolio fell\u00a0from 16.3% to 11.8%.<\/p>\n

“We have consciously chosen to reduce our allocation by moderating our investment pacing in recent years and selectively and opportunistically selling some of our exposure in secondary markets,” Cotton, PSERS’ CIO, wrote in his statement.<\/p>\n

Last October, Alaska pension officials concluded that \u201ckey drivers of private equity\u2019s \u2018golden era\u2019 in the past couple of decades may have reversed,\u201d referring to tightened credit, geopolitical tensions, and increased borrowing costs.<\/p>\n

\u201cThat period was unusually favorable and it\u2019s unlikely PE returns will snap back to those averages.”\u00a0They predicted returns from private equity investments to fall to high single-digits to low double-digits from the mid-to-high teens that many investors expected.\u00a0<\/p>\n

\u201cIf the expected future returns are not adequately higher for private equity,” the Alaska Permanent Fund Corporation, a state agency, wrote in a report last October<\/a>, “the rationale for taking on higher risks (illiquid, levered, idiosyncratic, high fees) may have eroded.”<\/p>\n

Private equity has not always lagged.<\/p>\n

PSERS began investing in\u00a0private equity\u00a0in\u00a01998. Since then, the asset\u00a0class has produced an annualized return of 10.96%, according to state records.<\/p>\n

HgCapital 8 and New Mountain Partners III and V more than doubled investors’ money. First Reserve XII, an oil and gas fund, generated only 55 cents of value for every dollar invested. Interactions returned 2 cents.<\/p>\n

Gilroy said private equity firms have a tall order. They must pick not only the right companies and industries but also at the right time.<\/p>\n

“Timing matters a lot,” he said. “If you’re California’s pension funds, you got into private equity early and made money. Other pension funds haven’t done as well.”<\/p>\n

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