How Public Pension Plans Have Shaped Private Equity

William W. Clayton

Private equity is one of the most important asset classes in the global investment marketplace. The rise of private equity over the past two decades has been fueled in significant part by public pension plans. Historically, these institutions avoided alternative investments, but today public pension plans are collectively the largest investors in private equity funds. This Article identifies several ways in which public pension plans have shaped the modern private equity industry, using the SEC’s three-part mission as an analytical framework. First, public pension plans have complicated the orderliness and efficiency of private equity contracting by introducing several distinctive non-market incentives and requirements to the industry. Second, large-scale investment in private equity by public plans has also increased the number of ordinary people who are impacted by private equity fund performance. Over the years, the SEC has repeatedly pointed to public pension plans—which manage the retirement assets of teachers, firefighters, and other public servants—as an investor protection based justification for its expanded regulatory presence in private equity. Third, the massive flow of public pension capital to private equity over the years has also had important implications for capital formation dynamics and the distribution of bargaining power in the private equity industry. For all these reasons, private equity is far more public than is commonly understood. Even though private equity funds are considered “private funds” under the federal securities laws, public pension plans have left a deep imprint on how the industry operates, and the industry’s operations have enormous consequences for the fiscal health of states and localities across the country.