Pension Funds Plunge Into Riskier Bets – Just as Markets Are Struggling

U.S. public pension funds don’t have nearly enough money to pay for all their obligations to future retirees. A growing number are adopting a risky solution: investing borrowed money.

More public pension plans than ever are using leverage, investing borrowed money in an effort to earn higher returns and close big funding gaps.

Private equity fundraising has been on the rise in recent years, as investors seek to capitalize on the industry’s strong performance. Private equity firms have raised a record $1.2 trillion globally in the last five years, according to data from Preqin.

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One of the key drivers of private equity’s success has been its ability to generate high returns for investors. Private equity firms typically seek to buy undervalued companies and then improve their operations, in hopes of selling them at a profit later on.

While this strategy can be risky, it has paid off for many investors. Private equity firms have outperformed the stock market in 11 of the last 15 years, according to data from Cambridge Associates.

With returns like these, it’s no wonder that public pension funds are increasingly turning to private equity as a way to close their funding gaps. However, there are risks associated with this strategy.

Private equity investments are illiquid, meaning they can be difficult to sell. And because they are often made with borrowed money, they can amplify losses if the underlying investment goes sour.

Source: Wall Street Journal

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