Key Takeaways
- • Seven major U.S. public pension systems—Ohio, Maine, Nevada, Washington, Oregon, Texas, and Alaska—reduced private equity allocations during 2025 amid sector underperformance and structural headwinds, signaling a broader retrenchment among institutional investors.
- • The $85 billion Alaska Permanent Fund Commission (APFC) staff recommended cutting private equity allocation from 18% to 15%, with investment staff characterizing private equity's "golden era" as past and noting that deteriorating economics have created a logjam of $3 trillion in unsold deals and excess dry powder.
- • Private equity 5-year annualized returns peaked in 2021 and have declined substantially; APFC analysis from Callan and Cambridge Associates projects further deterioration to approximately 6% by 2026, compared to the historical performance that justified elevated allocations.
- • U.S. public pensions on average allocate 14% to private equity, reflecting a 15-year shift toward higher-risk, high-fee, illiquid alternatives, but rising capital deployment constraints and performance drag are forcing portfolio rebalancing across the sector.
Summary
A significant rotation away from private equity is underway among major U.S. public pension systems in response to sustained underperformance and structural imbalances in the alternative asset class. During 2025, state retirement systems in Ohio, Maine, Nevada, Washington, Oregon, Texas, and Alaska all reduced their private equity commitments, while the Alaska Permanent Fund—managing $85 billion in assets—is preparing to scale back its allocation. This coordinated pullback reflects growing institutional skepticism about private equity's ability to deliver returns that justify its elevated fees and illiquidity constraints.
The deterioration in private equity fundamentals has become difficult to ignore. According to Financial Times reporting cited in March 2025, private equity assets under management fell for the first time in decades as the sector accumulated a $3 trillion backlog of ageing and unsold portfolio companies. Investment staff at the Alaska Permanent Fund Commission characterized the situation bluntly: "there is no investment idea so good that it cannot be ruined by too much capital." The APFC staff recommended reducing the fund's private equity allocation from its current 18% to 15%, noting in October presentations to the board that private equity's "golden era" is now in the rearview mirror.
Performance data underscores this deterioration. Private equity 5-year annualized returns peaked in 2021 and have since contracted substantially. Analysis from Callan and Cambridge Associates presented to APFC staff projects further decline, with returns expected to trend toward approximately 6% by 2026. This performance trajectory stands in sharp contrast to the outsized returns that fueled institutional adoption over the past 15 years. The average U.S. public pension currently allocates 14% to private equity, reflecting the broader industry embrace of higher-risk alternatives despite their structural drawbacks.
The reduction in allocations stems from compounding pressures: excess dry powder that remains undeployed, zombie companies unable to exit, and fee structures that erode net returns for beneficiaries. Pension boards are increasingly questioning whether private equity's risk profile and illiquidity premium remain justified in an environment of deteriorating returns and crowded capital. The actions by these seven major state systems, combined with APFC's pending board review in early 2026, suggest the private equity retrenchment among public pensions will likely accelerate as fiduciaries prioritize beneficiary returns over exposure to a capital-saturated asset class.
The deterioration in private equity fundamentals has become difficult to ignore. According to Financial Times reporting cited in March 2025, private equity assets under management fell for the first time in decades as the sector accumulated a $3 trillion backlog of ageing and unsold portfolio companies. Investment staff at the Alaska Permanent Fund Commission characterized the situation bluntly: "there is no investment idea so good that it cannot be ruined by too much capital." The APFC staff recommended reducing the fund's private equity allocation from its current 18% to 15%, noting in October presentations to the board that private equity's "golden era" is now in the rearview mirror.
Performance data underscores this deterioration. Private equity 5-year annualized returns peaked in 2021 and have since contracted substantially. Analysis from Callan and Cambridge Associates presented to APFC staff projects further decline, with returns expected to trend toward approximately 6% by 2026. This performance trajectory stands in sharp contrast to the outsized returns that fueled institutional adoption over the past 15 years. The average U.S. public pension currently allocates 14% to private equity, reflecting the broader industry embrace of higher-risk alternatives despite their structural drawbacks.
The reduction in allocations stems from compounding pressures: excess dry powder that remains undeployed, zombie companies unable to exit, and fee structures that erode net returns for beneficiaries. Pension boards are increasingly questioning whether private equity's risk profile and illiquidity premium remain justified in an environment of deteriorating returns and crowded capital. The actions by these seven major state systems, combined with APFC's pending board review in early 2026, suggest the private equity retrenchment among public pensions will likely accelerate as fiduciaries prioritize beneficiary returns over exposure to a capital-saturated asset class.
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