Minnesota pensions embraced investing in private equity, a big risk that’s paid off

Minnesota’s pension funds have stayed above water this year, notching positive returns even as economic uncertainty sent markets tumbling.

Keeping the retirement plans of hundreds of thousands of government workers intact through ups and downs requires a willingness to take on some risks. And Minnesota has been a leader in embracing risk in search of higher returns.

In the wake of the Great Recession, pension funds across the country expanded private equity investments to guard against downturns, diversifying holdings beyond stocks and bonds.

The state’s private equity holdings outpace most others.

“The higher the risk, the higher the long-term return, so there’s no miracle,” said Michael Markov , CEO of Markov Processes International, a company that uses publicly available pension returns data to assess risk.

The Minnesota State Board of Investment is responsible for the investments of three pension funds: The Minnesota State Retirement System; Public Employees Retirement Association; and Teachers Retirement Association.

Minnesota’s teachers, firefighters, snowplow drivers and other government workers pay into the system and then receive a monthly benefit when they retire. The $96 billion in combined funds are invested on behalf of about 800,000 retirees, survivors and current employees.

The board of investment raised the target percentage of its portfolio in private markets — which include private equity, private credit, real estate and real assets such as natural resources and infrastructure — from 15% to 20% in 2008. Another bump occurred in 2017 to 25%, of which about three-quarters is in private equity.

The size of the three funds’ private equity holdings in 2024, more than 17% of total invested assets, ranked in the top 20 pension funds worldwide, according to S&P Global.

Private equity made up 19% of invested assets in 2023, higher than the national average of about 13%, data from the nonprofit Equable Institute show. Washington state had the highest allocation, at more than 28%.

For Minnesota, the strategy seems to be working. In fiscal year 2024, the combined funds reported returns of more than 12%, well above the 7% target. The funded ratio — the plans’ assets divided by liabilities — was higher than most of the country at about 93%.

The size and diversity of a pension fund’s portfolio can protect it from shocks. And unlike a 401(k), a retiree’s benefits are set for life, so long as the fund stays solvent.

Jill Schurtz, Minnesota State Board of Investment executive director and chief investment officer, said the board notched 0.1% growth in the first quarter — Jan. 1 to March 31 — compared to a nearly 5% drop for the benchmark Russell 3000 stock market index. Between July 1 and May 13, the state lagged the Russell 3000 slightly — 7.3% compared to almost 8%.

“This is one of those moments where the key differences between a defined benefit plan approach and an individual, 401(k) approach really shine through,” Schurtz said. “If I pull back the lens and think about, what does that mean when we talk about the power of having a diversified portfolio in this environment, we’re really seeing it in action right now.”

A dollar invested in safe bets — like bonds or Treasury bills — in 1980 would have grown to $18.22 by this year, Schurtz told state lawmakers earlier this year. The same dollar invested in the state’s diversified portfolio generated $74.43 during that time.

Yet private equity can be a murky business, with high fees, less transparency and valuation methods that can lead investors to overestimate the value of their investments.

“There’s a debate not just over whether or not the returns are as good as gets reported,” but also whether private equity does well when publicly traded equity is down, said Anthony Randazzo, Equable Institute executive director. “There’s economic uncertainty: Consumer sentiment; consumer purchases; higher prices as a result of tariffs. That’s going to affect a lot of publicly traded companies in the same way it’ll affect privately traded, privately held companies.”

Private equity managers pool money from big investors, such as pensions, endowments and sovereign wealth funds, and use it to buy companies. Because those companies aren’t listed on the stock exchange, it’s hard to know how much they’re worth.

Managers value their portfolios by comparing companies they hold to other companies, often publicly traded ones. The true value is unknown until managers “exit,” typically by selling the companies they’ve acquired or taking them public, years after investors commit funds.

The risk lies in the in-between period, when investments cannot be cashed out and a business can growth and thrive or struggle and lose value.

Minnesota’s pension funds are among the riskiest in the country because of how much they have invested in both public shares and private equity — the bulk of their investments — according to analysis from Markov Processes International.

The state’s investment board sees the risk as worth the reward.

“The [board of investment] recognizes that this sizable policy allocation to public and private equity relative to fixed income investments will result in increased volatility of returns and may result in periods of short-term relative underperformance,” according to the 2024 annual report.

“Nevertheless, it is expected that future long-term returns for this type of policy will continue to compensate for the additional volatility.”

Minnesota’s pension funds are invested with a range of private equity managers, from industry behemoths like the Blackstone and Carlyle groups to Minnesota firms.

One of those state managers, the now-defunct Wayzata Investment Partners, faced Securities and Exchange Commission penalties including a censure and $60,000 fine last year after a company leader contributed $4,000 to Gov. Tim Walz’s campaign.

Walz is a member of the state board of investment, along with Secretary of State Steve Simon, Attorney General Keith Ellison and State Auditor Julie Blaha.

The board last invested with Wayzata Investment Partners in 2012 when it had different members, according to Schurtz. Wayzata notified investors in 2017 that it would not raise capital for future funds, she said.

The board of investment first dabbled in private equity in the 1980s and has long-term relationships with fund managers, Schurtz said.

“We’re in this space because we realize that we’re investing, for the most part, in American businesses, where these are great businesses, where a company can come in and give them financial, operational or leadership improvements or investments, and then we can realize tremendous value when they come out the other side,” she said.

In a presentation to lawmakers, Schurtz said that in a downturn, pension funds with less money allocated to private equity would probably fare better.

“We think even if we have to endure volatility,” she said, ”it is in the long-term best interest of our members to do so."

The board’s reported private market returns in recent years show the dramatic ups and downs. After a negative performance in fiscal year 2020, the year the pandemic began, returns shot up to nearly 40% in 2021 and then dropped to about 25% in 2022. After falling below 2% in 2023, they landed around 8% in 2024.

Last fiscal year, Schurtz told lawmakers, investing in private markets allowed Minnesota’s pension funds to outperform funds in other states, including California, New York, Wisconsin and Florida. Staying out of those private markets is “putting yourself at a disadvantage,” she said.

State Sen. Nick Frentz, DFL-North Mankato, who chairs the Legislative Commission on Pensions and Retirement, said he was comfortable with the State Board of Investment’s decisions.

“You could buy all Treasury bills,” Frentz said. “You would have super low risk. You wouldn’t be worried about a downturn in the economy at all, but our rate of return would be too low.”

The proposed state budget deal Walz and legislative leaders announced Thursday would increase pension spending by $40 million per year for the next four years.

Republican members of the commission declined to comment.

After coasting the past few decades on relatively low inflation and high growth, this moment of economic uncertainty could spell trouble for private equity and its investors.

Deals for firms to exit private equity control have slowed as the equity markets struggle, meaning a drop in investor earnings. Analysis from S&P Global shows exit activity in the first quarter of 2025 was the lowest in two years.

Minnesota’s board of investment has continued to receive distributions from its private markets managers, according to Schurtz, including more than $3.8 billion in calendar year 2024 and $1.8 billion so far in 2025.

Stephen Johnston, director at Omnigence Asset Management in Alberta, Canada, said he anticipates the private equity market moving toward smaller, less expensive, businesses. But that transition will take time.

In the shorter term, pension funds could face losses across private equity and other private market investments, he said.

“There is a place for alternatives and private assets in portfolios,” Johnston said. “But I think that that good idea has been taken too far.”