Public pensions shrink private equity as headwinds persist, returns drag

Several large public pensions cut back allocations to private equity in 2025 in the face of the industry’s poor performance and unrelenting headwinds.

Among the public asset owners that have stepped back from private equity are state retirement systems in Ohio, Maine, Nevada, Washington, Oregon, Texas and Alaska, while the state’s sovereign wealth fund, the Alaska Permanent Fund, is preparing to scale down.

The Financial Times reported in March that “Private equity assets under management fell last year for the first time in decades as investors confronting a $3tn backlog of ageing and unsold deals pulled back from committing new funds to the sector.”

The $85 billion Alaska Permanent Fund’s (APFC) current allocation to private equity is 18%, but staff have recommended a reduction to 15% for the board to review in early 2026, with investment staff suggesting private equity’s “golden era” is in the rearview mirror.

On average, US public pensions allocate 14% to private equity, reflecting the shift toward alternatives over the past 15 years – which are higher risk, high fee and illiquid. But private equity’s rapid growth paired with deteriorating economics have led to a logjam of zombie companies and mountains of undeployed capital, called dry powder, leading the AFPC staff to quip, “there is no investment idea so good that it cannot be ruined by too much capital.”

Staff for AFPC presented the board with declining returns expectations for private equity in October, noting a performance peak in 2021 with 5-year annualized returns dropping and expected to “trend even lower towards around 6%” in 2026, per analysis from Callan and Cambridge Associates. 

“If the expected future returns are not adequately higher for private equity, the rationale for taking on higher risks (illiquid, levered, idiosyncratic, high fees) may have eroded,” AFPC staff’s presentation said.

The Washington State Investment Board oversees $230 billion, and was one of the first pension funds to leap into private equity four decades ago. WSIB currently has one of the highest actual allocations to private markets overall at 54% of the portfolio, including 28% in private equity. But the board voted in November to reduce the private equity target by 2 points to 23% – although the risk mitigation potential of such a move was tempered by assigning 3% to private credit, which is also facing growing skepticism.

Oregon’s $100 billion state pension has been paring down its private equity portfolio. Consultant Meketa has noted private equity is dragging down the OPERF’s overall fund returns, noting that the “Private Equity (-1.5%) overweight and underperformance was the largest detractor from third quarter (2025) benchmark relative returns.” Treasurer Elizabeth Steiner has announced she is working with investment staff to continue paring down to reach the current 20 percent target, and indicated she’s open to adjusting the target further.

The $110 billion Ohio Public Employees Retirement System voted in November to trim private equity by 1 point to a 14 percent target, “expressing concerns over lack of opportunities in the asset class, along with liquidity risk,” per Buyouts. There are “significantly fewer opportunities for finding value in the private equity market,” according to Meketa per Buyouts.

The $70 billion Nevada Public Employees Retirement System reduced its target private equity allocation by 1 point to 5 percent, Private Equity International reported in September. NVPRS already has a much lower allocation to private markets allocation target at 15 percent, half the average size for public pensions. 

Alaska’s $36 billion Retirement Management Board also approved a cut to its private equity allocation to 12 percent from 14 percent at its December meeting, citing “lower than expected” distributions and a need for liquidity, Buyouts reported.

Maine PERS, with $21 billion AUM, voted to adopt a staff recommendation for a 2.5 percent reduction at the November board meeting which cuts private equity to a 10 percent allocation, following a 2022 reduction from 15 percent.

Texas Teachers Retirement System, currently with $225 billion in assets, was one of the early funds to make a significant reduction in its private equity target, dropping it by 2 points to 12 percent in 2024 in light of the asset class’s “dwindling returns,” Bloomberg reported.