Pension Funds and Private Equity Real Estate: History, Performance, Pathologies, Risks

Abstract

I study the history and performance of commercial real estate (CRE) in the pension fund portfolio, showing how many plan sponsors fundamentally changed their approach to CRE investment once underfunding gaps began to emerge in the early and middle 2000s. Several new empirical facts are presented, including pension fund share ownership estimates of private equity real estate (PERE) in excess of 50%, reconfirmation of underperformance of Value-add and Opportunity PERE funds, and the apparent existence of an illiquidity price premium paid by pension funds for the “volatility veil” that PERE fund investment provides. Three types of concentration risks are identified, including high geographical ownership concentrations. The risks that pension funds and their investment in PERE funds pose to economic and financial stability have been exacerbated by the negative aftershocks of the COVID-19 pandemic.

Keywords: Pension funds, Real Estate, Private Equity, Financial Stability, Systemic Risk, COVID-19

JEL Classification: B26, D14, D61, D73, E02, E21, E61, G11, G18, G23, G28, G32, G38, G51, H11, H55, H75, L22, N22, N42