Opinion: Private equity strengthens public pensions
As presidential candidates square off in Detroit, some use their time in the spotlight to discuss their plans to help the middle class. That conversation should include the importance of private equity.
Businesses backed by private equity employ millions of middle-class Americans, providing incomes for families across the country. Just as importantly, those investments help strengthen the accounts of millions of additional public-sector workers who depend on pension plans to fund their retirements. That means teachers and firefighters depend on those superior returns to support them once they retire.
More than a half million Michiganians have a private equity-backed pension. That’s 1 in 13 people in the Wolverine state. In fact, the State of Michigan Retirement System has the 9th largest private equity investment of any public pension fund in the country. In 2018, private equity invested more than $17 billion in 158 Michigan-based businesses. Private equity-backed Michigan businesses employ 127,000 workers.
Nationwide, private equity investments delivered a 10.2% median annualized return for public pensions over the past 10 years. These returns surpassed public equity’s 8.5%, fixed income’s 4.8% and real estate’s 4.8%.
Public pension funds collectively face a $1.28 trillion shortfall according to the Pew Charitable Trust. Private equity exposure helps public pensions to meet their obligations.
Ninety-one percent of public pension funds partner directly with private equity because our industry provides high and stable returns. The California Public Employees Retirement System (CalPERS) is the largest public pension fund in the nation. Earlier this year, CalPERS Chief Investment Officer said, “We need private equity, we need more of it, and we need it now.”
Policymakers should support policies that encourage investment, just like we are seeing in downtown Detroit. Policies and rhetoric matter when it comes to private investment.
So how exactly does private equity help teachers and first responders in Michigan? Private equity firms partner with public pension funds to buy companies, improve their performance, create jobs and add long-term value. The returns from these ventures go directly to the firm’s investors, most of whom are public pension funds. Local teachers, first responders and dedicated public servants collect these returns in their pensions when they retire.
In 2005, several private equity firms bought Dunkin Donuts. For the next seven years, private equity brought in industry experts who transformed Dunkin’s management team, instilled a service-oriented culture, and added healthier options to the menu. They even implemented Dunkin Donuts’ famous marketing campaign, “America Runs on Dunkin.”
These long-term investments were a boon for the company. From 2005-12, Dunkin Donuts added almost 5,000 locations, creating new jobs in each community. Over the same period, Dunkin Donuts increased earnings by over 70%. The public pensions who partnered with private equity took home more than three times their investment.
Successful private equity turnarounds like this happen all the time, directly benefiting businesses, communities, and public pension funds.
Private equity investments also support communities across the country. From 2013-18, private equity invested $3.4 trillion in 35,000 businesses nationwide. Collectively, these private equity-backed businesses employ 5.8 million Americans.
More than 20 Democrats are taking the debate stage this week, promising to fight for the middle class. But private equity is already supporting the jobs and retirements of millions of middle-class public servants in Michigan and across America. We hope workers don’t lose sight of that fact amid all the presidential grandstanding.
Drew Maloney is the president and CEO of the American Investment Council.