Pension Funds and Private Equity Real Estate: History, Performance, Pathologies, Risks

Abstract

I study the history and performance of commercial real estate (CRE) in the pension fund portfolio, showing how many plan sponsors fundamentally changed their approach to CRE investment once underfunding gaps began to emerge in the early and middle 2000s. Several new empirical facts are presented, including pension fund share ownership estimates of private equity real estate (PERE) in excess of 50%, reconfirmation of underperformance of Value-add and Opportunity PERE funds, and the apparent existence of an illiquidity price premium paid by pension funds for the "volatility veil" that PERE fund investment provides. Three types of concentration risks are identified, including high geographical ownership concentrations. I argue the risks that pension funds and their investment in PERE funds pose to economic and financial stability have been exacerbated by the negative aftershocks of the COVID-19 pandemic.

The remote work revolution: Impact on real estate values and the urban environment: 2023 AREUEA Presidential Address

“…Some have argued that the slow mark-to-marking of such funds is a feature rather than a bug. Asness et al (2013); Gupta and Van Nieuwerburgh (2021); Riddiough (2022) suggest that investors may be willing to pay for this feature, in the form of an illiquidity premium.…”

“…Asness et al. (2013); Gupta and Van Nieuwerburgh (2021); Riddiough (2022) suggest that investors may be willing to pay for this feature, in the form of an illiquidity premium .…”

Handbook of Real Estate and Macroeconomics: An Introduction

“…Economists are also aware that commercial real estate plays a role in the economic growth and business cycle movements (Davis et al, 2020;Gort et al, 1999;Kan et al, 2004;Kwong and Leung, 2000). In this book, Riddiough (2021) shows how commercial real estate and its securitization could impact retirement financing.…”