Benchmarking Private Equity Portfolios: Evidence from Pension Funds

Abstract

We study agency frictions in U.S. public pension funds' private equity (PE) portfolios, focusing on how intermediary agents (e.g., investment consultants) influence benchmark selection. We find significant variability in benchmark choices. Consultant turnover and poor PE performance are associated with benchmark changes, consistent with consultants' career concerns. Pension funds outperform their PE benchmarks approximately half the time, yet often select new benchmarks that historically and prospectively underperform previous ones. These choices appear driven more by consultants' incentives to expand client portfolios than by changes in PE performance expectations or realized returns.

Keywords: Benchmarking, Investment Consultants, Pension Funds, Private Equity

JEL Classification: G11, G23