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Exhibit 2 Pension Funds and University Endowments as LPs: The Indian Context A. PENSION FUNDS Pension funds are funds created to pay for retirement income. It is usually funded by voluntary contributions by individuals or by the government using tax-payer money. Pension funds account for large assets under management. For example, the assets managed by 300 of the world's largest pension funds totalled $14.9 trillion in 2013. 1 The top 13 pension markets account for $29.75 trillion in pension assets, accounting for 78.3 percent of the GDP of these economies. The asset size of some pension markets, even exceed that of the national GDP, as seen in the case of US, UK, Switzerland, Netherlands, and Australia. 2 North America remained the largest region in terms of AUM, accounting for 41.4 percent of the total worldwide assets. As the longevity of lives as well as average standard of living is rising all over the world, pension assets are increasing at a fast pace. Given the long term liabilities of pension funds, i.e., they have to provide for pension income of retirees, they make long term investments. Globally, pension funds are savvy and sophisticated investors, investing in a variety of asset classes to earn returns, while also ensuring the safety aspect of the retirees pension income. For example, Canada Pension Plan, with an asset size of $198 billion earned a return of 16.5 percent in 2013. The Government Pension Fund of Norway, with an asset size of $849 billion, earned a return of 15.9 percent. CalPERS, the largest pension fund in the US, with an asset size of $283 billion earned a return of 12.5 percent in 2013. 3 Pension funds as LPs Pension funds form one of the largest categories of investors in the VCPE asset class. It has been so traditionally because of the PE asset class and the liabilities of pension funds. Pension funds have long term liabilities with limited need for liquidity as a percentage of total asset size, and PE funds have 8-10 year fund cycle, thereby making it a good match for both of them. Public and private pension funds made up 43 percent of capital invested by PE funds during 2001-2011. 4 On a dollar-weighted basis, the U.S. public pension funds invest 10.3 percent of their portfolio in private equity. 5 European public and private pensions allocate around 4 percent to the asset class whereas Australasian allocations are just over 5 percent. 6 Given the large asset under management of the pension funds, the absolute value of their investment in PE asset class turns out be significant. Table E2.1 gives the target investment in PE asset class for some of the largest pension funds around the world. Table E2.1: Target investment in PE asset class for some of the largest pension funds Fund Assets under management ($, billion) Target investment in PE as a percent of assets under management Stichting Pensioenfonds ABP, The Netherlands 427 5% @ California Public Employees' Retirement System (CalPERS), USA 289.8 13% # California State Teachers' Retirement System (CalSTRS), USA 189.1 12.8% & Caisse de dépôt et placement du Québec (CDPQ), Canada 176 10% * Legend: @ 2010-12 average; # 2013-14 average; & 2012-14 average; * 2013 figures Source: Respective websites Figure E2.1 shows the total number of US-based public pension funds that have invested in PE and their average allocation to PE asset class over the past four years. It can be seen that in recent years there has been growth both in the number of funds that invest in PE and also in the allocation to the PE asset class. 28
No. of US-based Public Pension FUnds in PE 310 300 290 280 270 260 250 240 7.2% 299 294 7.0% 6.8% 266 266 266 6.2% 6.2% 2010 2011 2012 2013 2014 YTD Year No. of US-based Public Pension Funds in PE Avg PE Allocation (% of AUM) 7.4% 7.2% 7.0% 6.8% 6.6% 6.4% 6.2% 6.0% 5.8% 5.6% Avg PE Allocation (in %) Source: Preqin Private Equity Spotlight - October 2014 Figure E2.1: US public pension funds that invest in PE and their average PE allocation Pension Funds in Ind ia The pension system in India is dominated by the Employees Provident Fund Organistation (EPFO) for salaried employees and the National Pension Scheme which besides catering to central and state government employees (who joined after 2004), is also open to the public. Besides these, investors may also opt for pension products offered by several public sector as well as private pension fund providers as well as insurance companies. The Pension Fund Regulatory Body of India (PFRDA) has been set up to regulate this sector. EPFO The Employees Provident Fund of India administers the compulsory contributory Provident Fund Scheme, Pension Scheme and an Insurance Scheme for employed workers. It is one of the largest social security organisations in India in terms of the number of covered beneficiaries and the volume of financial transactions undertaken. Table E2.2 gives the investment corpus of various funds and schemes under EPFO. Table E2.2: EPFO investment corpus EPFO INVESTMENT CORPUS AS ON 31.03.2013 (in Rs crore.) Provident Fund Exempt organizations Non-exempt organizations 4,36,662.90 159,014.00 277,649.39 Pension Fund 1,83,405.36 Insurance Fund 12,090.84 TOTAL 6,32,159.10 Source: EPFO Annual Report 2012-13 The Central Board of Trustees, Employees' Provident Fund, frames investment guidelines for investment decisions of EPFO within the pattern of investment prescribed by the Central Government. EPFO currently does not have investments even in conventional equity, let alone in PE, which is classified under alternate assets. For example, at the end of March 2013, the investment corpus amounting to Rs 473,145.59 crore from provident fund of non-exempt organizations, pension fund, and insurance fund was invested in the following manner 7 : Central government securities - 24.58 percent; State government securities - 14.65 percent; Government guaranteed securities - 2.73 percent; special deposits - 11.44 percent; bonds issued by public sector companies and financial institutions - 31.81%; and public accounts - 14.79%. However, there has been increasing calls in recent days to gradually liberalize the pension sector to enable investment in equities to start with and which can subsequently expand to invest in other alternate asset categories such as PE. Recent reports indicate that the government is considering a change in norms that would allow pension funds to invest in equities. 8 29
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Exhibit 6 Returns from VCPE investm
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however, accounted for only 17% of
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India Venture Capital and Private E
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