Will Private Equity Decimate Retirement Plans?

Plus: We outline portco M&A and exits from the past two weeks.

401-KO.

If the federal government allows retirement accounts to invest in private equity products, it would be nothing short of disastrous for retirees. But the decision couldn’t be better timed for the industry, which has seen all-time low fundraising figures for the third year in a row.

I’ll keep my critiques brief: they don’t stray far from the various opinions that are already out there. The funds are illiquid, with too-high fees demanded for managing assets with souped-up valuations. The returns for the industry are often concentrated in top-performing funds, meaning unlucky allocations could lead to huge losses for vulnerable people.

The CalPERS Case.

Those who argue that government regulation can mitigate risk by, say, providing a formal allocation limit need to look no farther than the nation’s largest pension fund, CalPERS, to see why this is a bad idea.

CalPERS’s private equity allocation has long been controversial. In the past, the pension fund faced probes into its private equity allocation because experts noticed that there was opacity on fees (to such an extent that a probe in 2015 found that a 20-year return for its PE portfolio dropped from a 19.3 percent return to a 12.3 percent return when inclusive of fees to managers).

Now, the pension fund is facing a probe into its PE portfolio for lagging behind comparable pension funds’ PE returns. Its underperformance is likely due to the fact that CalPERS didn’t invest in the top-quartile PE funds that actually make a high return. Additionally, experts believe PE’s high fees are eating into CalPERS’s distributions.

Despite this, CalPERS has signaled that it wants to double down on PE investments due to its portfolio garnering an 11.3 percent return over the past 12 months.

It’s an impressive figure, but a figure achieved by increasing co-investment vehicles (which are fee-free) and revising the managers worked with: meaning the issues of high fees and GP performance disparity still stand.

Alternatives to Alts.

I would be remiss not to mention that, over the past ten years, private equity as a whole has outperformed other asset classes. A recent report from the lobbying firm The American Investment Council (AIC), formerly the Private Equity Growth Capital Council (PEGCC), found that PE investments delivered a 13.5 percent median annualized return in 2024. Sounds great!

But that’s over a 10-year period — meaning a big chunk of cash came in when interest rates were low and business was booming. I would argue that historical returns aren’t as important here as PE advocates make them out to be. Rather, the dramatic shifts we’re seeing in private equity right now are indicative of how the industry will perform in the years to come.

According to a McKinsey report, for the year 2024, PE returns were just 3.8 percent, underperforming public markets for the third year in a row. Distributions have also been lagging — 2024 was the first year that LPs saw net inflows of cash from their PE investments via distributions since 2015, likely due to depressed fundraising numbers.

And it's worth noting that a substantial amount of distributions aren’t coming from successful exits, which have yet to rebound from historic lows, but creative measures like NAV loan-funded distributions, continuation vehicles, and LP-led secondaries transactions.

Is this an issue that PE funds can just “wait out” until interest rates drop? Some may be able to — but not all. The exit drought will likely continue for a number of assets that can’t find a buyer, such as renewable energy assets that have lost government subsidies, mega assets with limited amounts of buyers, and underperforming assets with inflated valuations that refuse to come back to earth. The last point will be an incredibly sticky one, with government agencies in the UK, Australia, and France probing into PE valuation practices to try and eliminate the systemic risk it poses.

Even the largest, most sophisticated public funds can struggle to execute a private equity strategy well. During a time of volatility, when the wheat will be separated from the chaff, why are we pulling people’s vital nest eggs into this?

I understand that retirement accounts are struggling to hit their targeted seven percent annual return — but incorporating private equity is likely not the way to get there.

PE portcos also saw some full and partial exits over the past two weeks, as well as some exits-to-be:

• Eurazeo entered into discussions to sell its entire stake in CPK Group, a conglomerate of European confectionery brands created in 2017 via a carve-out from Mondelez and Lutti, to Ferrara Candy Company. Expected proceeds are about €240  million ($280 million).

• PAI Partners and Abu Dhabi Investment Authority completed the acquisition of a majority stake in Alvest, a French airport equipment provider, from Ardian, which acquired the firm in 2018. Financial terms were not disclosed. Ardian will retain a minority stake.

• Warburg Pincus sold a majority stake in A-LIGN, a cybersecurity and compliance solutions provider, to Hg for an unknown sum.

• CVC offloaded a minority stake in Etraveli Group, an online travel company it has held since 2017, to KKR at a €2.7  billion valuation.

• The Carlyle Group agreed to sell fintech company Calastone, a fund transaction network, to SS&C Technologies. Carlyle acquired Calastone in 2020; terms of the exit were not disclosed.

• Bain Capital sold Keystone Agency Partners, an insurance brokerage platform, to Warburg Pincus. Bain established the platform in 2020. Financial terms were not disclosed.

• Turning Rock Partners exited South Reach Networks, a telecom infrastructure provider the firm has backed since 2019, to Blue Owl. Financial terms were not disclosed.

• EQT sold WASH, a provider of commercial laundry services the firm has owned since 2015, to Northleaf Capital and AVALT for an unknown amount.

• Advent International sold Donte Group, a Spanish dental chain, to Ontario Teachers' Pension Plan for $1.2 billion.

Meanwhile, portco M&A was in full swing:

• PSP-backed StormTrap, a UK-based stormwater management system provider, acquired Faircloth Skimmer, a manufacturer of drain dewatering devices, for an undisclosed sum.

• OTPP-backed Westland Insurance acquired Forefront Insurance, a California-based personal lines and specialty insurance broker. Financial terms were not disclosed.

• Blackstone’s Chamberlain Group, a manufacturer of automated garage-door openers, purchased Arrow Tru-Line, a garage door component manufacturer, from MiddleGround Capital for an unknown amount.

• Arlington Capital’s TEAM Technologies, a medical device contract manufacturer, acquired Duke Empirical Inc., a specialist in FDA-regulated device production, for an unknown sum.

• Alliance Technical Group, an engineering and calibration services firm owned by Morgan Stanley Capital, bought competitor ESC Spectrum. No financial details were released.

• Advantive, a manufacturing execution systems solutions provider owned by TA Associates, acquired PINpoint, a software provider in the same sector. Financial terms were undisclosed.

• AE Industrial’s CASE, a construction equipment dealer consolidator, bought Ragnarok, a SaaS provider of equipment telematics and analytics, for an undisclosed amount.

• LS Power, via its portfolio company Clearlight Energy, agreed to buy bp (British Petroleum)’s U.S. onshore wind business. Financial terms were not disclosed, but the deal is expected to close in 2026.

• Rocscience, an engineering software specialist owned by TA Associates, acquired peer 2SI for an unknown sum.

• PAI Partners-backed Compleat Food Group, a European foodservice distributor, acquired Freshpak, a UK catering supplier, for an unknown amount.

• Dessert Holdings, a dessert manufacturer owned by Bain, bought Willamette Valley Pie Co., an artisan bakery in Oregon. Financial terms were not disclosed.

• Hyve Group, an international organizer of exhibitions and conferences backed by Searchlight Capital Partners and Providence Equity, acquired Behavioral Health Tech, a B2B events company in the healthcare tech space. Financial terms of the transaction were not disclosed.

And there were some key people moves:

• Welsh, Carson, Anderson & Stowe (WCAS) named Brian Kane as a senior advisor in healthcare services. Kane is the former CEO of Aetna and former CFO of Humana.

• Advent International appointed Frank Roe, the former CEO of software company SmartBear, as an operating partner.

• AE Industrial Partners brought on Oscar Torres as an operating partner. Torres joins after a 20-plus year career at Kellstrom Aerospace, a former AE Industrial portco which the firm exited to VSE Corporation in December 2024.

• Lloyd Howell, former advisor to the Carlyle Group, resigned over a perceived conflict of interest between his duties at the asset manager and his duties as the executive director of the NFL Players Association. This is because Carlyle is one of the few private equity firms that has been approved to buy minority interests in NFL teams.

Thanks for reading!