Pension funds access private markets primarily through three channels: closed-end fund commitments (LP interests in buyout, infrastructure, real estate or private credit funds), co-investments alongside GPs in individual deals (at reduced or zero additional fees), and direct investments where in-house teams originate and close transactions without external GPs. The average large public pension fund allocated approximately 11.5% to private equity as of year-end 2025, up from roughly 8.2% a decade earlier.
Answer
Pension funds invest in private markets through three primary channels: fund commitments (becoming limited partners in closed-end PE, infrastructure, real estate or private credit funds), co-investments alongside GPs in specific deals (often at lower fees), and direct investments made by in-house teams. The average large public pension fund allocated approximately 11.5% to private equity as of year-end 2025, up from 8.2% a decade ago, and many allocate a further 5–15% to infrastructure, real estate and private credit.
The mechanics of how pension funds access, size, and manage these allocations are central to understanding one of the most significant pools of private capital in the global economy.
Why Pension Funds Go to Private Markets
The fundamental case rests on three pillars:
The illiquidity premium: Private market investments are less liquid than public stocks and bonds. In theory, investors who can tie up capital for 5–12 years should earn a premium above equivalent public market returns. For pension funds with stable, long-horizon liabilities, this illiquidity is manageable — their obligations extend 30–50 years, and they have ongoing contribution inflows that fund operating needs.
Diversification: Private markets provide exposure to parts of the economy — mid-market companies, infrastructure networks, direct real estate — that are not represented in listed equity markets. This can genuinely diversify portfolio risk, though private asset valuations tend to correlate with public markets in severe downturns, with a lag.
Return enhancement: Over long periods, top-quartile private equity has outperformed public equity by several hundred basis points annually after fees. The ability to generate this excess return is what justified the complexity of private markets investing for the first generation of institutional allocators; the debate now is whether the premium has compressed as the asset class has grown.
Roughly 70% of surveyed limited partners in McKinsey's 2026 Global Private Markets Report planned to maintain or increase their private equity allocations, even as several major U.S. pension funds — in Ohio, Oregon, Alaska and Nevada — trimmed targets in response to compressed returns and liquidity challenges.
Channel 1: Fund Commitments
The dominant access route is the limited partnership commitment. A pension fund negotiates a Limited Partnership Agreement (LPA) with a GP (general partner — the fund manager), committing to invest a fixed amount of capital over the fund's investment period.
How It Works
The GP draws capital in installments — called "capital calls" — as it identifies and closes investments. The pension fund must wire committed capital within a short window (typically 5–10 business days) when a capital call notice arrives. Over a typical 3–4 year deployment period, a US$500 million commitment might be called in 8–15 separate capital calls.
The fund has a typical 10-year life, extendable by 1–2 years with LP consent. The GP manages the portfolio and seeks exits through trade sales, IPOs or secondary sales. Distributions flow back to LPs as exits occur, typically in the later years of fund life. The investor's internal rate of return (IRR) and multiple of invested capital (MOIC) are calculated across this full cycle.
Fee Structures
LP commitments carry fees: typically a 2% per annum management fee on committed capital during the investment period (stepping down to invested capital thereafter) and 20% carried interest (profit share) above a preferred return hurdle, usually 8%. These fees significantly reduce net returns; the net-to-gross spread for institutional investors in buyout funds has historically averaged 3–5%.
Why Fund Commitments Remain Dominant
For most pension funds, closed-end fund commitments are the dominant channel because they do not require in-house deal origination capabilities, provide manager diversification across multiple GPs, and allow exposure to asset classes (large-cap buyout, venture capital) where direct investing is not feasible. Even the most sophisticated direct investors — CPPIB, Ontario Teachers', Temasek — maintain significant fund programs to complement their direct capabilities and access GP deal flow networks.
Channel 2: Co-Investments
Co-investments are direct equity stakes in specific portfolio companies, offered by a GP to select LPs alongside a fund investment. When a GP's fund is acquiring a company that requires more equity than the fund can provide alone, the GP may invite large LPs to "co-invest" directly in the deal at the same valuation.
Why GPs Offer Co-Investments
GPs offer co-investments to strengthen relationships with large LPs, to complete deals that exceed fund concentration limits, and increasingly as a competitive differentiator to attract sophisticated institutional allocators who demand co-investment access as a condition of re-upping in funds.
Fee Economics
Co-investments typically carry reduced or zero management fees and zero or reduced carry. This makes them significantly more economical than fund commitments for the same economic exposure — a major reason institutional investors with scale have pursued co-investment programs aggressively.
Building a Co-Investment Program
Running a co-investment program requires capabilities that many pension funds lack: the ability to evaluate deals quickly (often in 2–4 weeks, compared to years for fund due diligence), sectoral expertise across buyout targets, and legal and execution resources to close transactions directly. Pension funds that have built leading co-investment programs — CPP Investments, Ontario Teachers', CalSTRS, CPPIB — typically employ dedicated deal teams organized by sector or geography.
CPP Investments, for example, has built one of the world's largest institutional direct and co-investment programs, with more than half of its private equity exposure now in direct and co-investment vehicles rather than fund LP positions.
Channel 3: Direct Investing
The most operationally intensive private markets channel, direct investing means the pension fund's own team originates, underwrites and manages private investments without a GP intermediary.
Who Can Do It
Only a small number of the world's largest pension funds have built credible direct investing capabilities:
- CPP Investments (Canada, ~C$700B): runs direct infrastructure, real estate, private equity and credit teams globally.
- Ontario Teachers' Pension Plan (Canada, ~C$250B): pioneered the direct model in the 1990s; owns airports, toll roads, major businesses across 50 countries.
- OMERS (Canada, ~C$130B): direct infrastructure via Oxford Infrastructure and private equity via OMERS Private Equity.
- GIC and Temasek (Singapore): both invest directly in unlisted companies across Asia and globally.
- Norges Bank Investment Management (Norway, ~$2T): runs large direct real estate and direct infrastructure programs.
- CalPERS and CalSTRS: have increased direct and co-investment exposure in recent years, though the U.S. public pension system's governance constraints limit how much can be internalized.
The case for direct: Elimination of GP fees (potentially 2% annual + 20% carry, worth hundreds of basis points annually over a 10-year fund life), greater control over deal selection and portfolio management, and faster deployment. For the largest funds at scale, the fee saving alone justifies the investment in in-house teams.
The challenges: Attracting and retaining private equity talent at compensation levels competitive with external GPs is difficult, especially for public pension funds with compensation constraints. Deal origination requires network development that takes years to build. And without the GP's diversified deal flow across multiple funds, direct programs can be more concentrated.
Private Markets Asset Classes: How Pension Funds Use Each
Private Equity (Buyout, Growth, Venture)
The largest private markets allocation for most pension funds. Buyout funds acquire controlling stakes in established companies, add operational value, and exit in 4–7 years. More than half of surveyed LPs in 2026 planned to maintain or increase PE exposure; mid-market buyout — with lower entry multiples and less leverage-dependency than large-cap — attracted renewed institutional interest as rates stayed elevated.
Infrastructure
Infrastructure — toll roads, airports, utilities, ports, data centers, energy transition assets — has grown from a small alternative allocation to a core portfolio category for large pension funds. Infrastructure offers stable, inflation-linked cash flows over long periods that match pension fund liability structures. ABP is targeting 10% infrastructure allocation; CPP Investments and Ontario Teachers' have been direct infrastructure investors for over two decades.
Private Credit
Private credit — direct lending, infrastructure debt, real asset finance, asset-backed lending — has grown to approximately US$1.7 trillion globally. Pension funds are both investors in private credit funds and, increasingly, direct lenders to corporates and infrastructure operators. The asset class offers floating-rate income, lower historical default rates than public high yield, and diversification from listed fixed income.
Real Estate
Core and core-plus real estate (stabilized, income-generating properties) has long been part of institutional portfolios. Pension funds with liability-driven constraints favor long-lease, inflation-linked commercial real estate — logistics, senior living, healthcare facilities, ground leases — over higher-risk value-add or opportunistic strategies.
Portfolio Construction and Pacing
Managing a private markets program requires explicit attention to commitment pacing — the annual cadence of new commitments needed to maintain a stable allocation:
A fund that targets 15% PE allocation but deploys over 4 years will experience a "ramp-up period" where actual invested capital is well below target. If the pension simultaneously receives distributions from maturing funds, it needs to commit new capital to maintain exposure. Modeling expected capital calls, distributions, and NAV appreciation across all active fund relationships is a significant operational task that large private markets teams manage with dedicated software (e.g., iLevel, Allvue, Burgiss).
The secular increase in private markets allocations across the institutional world — from around 5% for large pension funds in 2005 to 11–15% today — reflects both the maturation of private markets as an asset class and the sustained outperformance that justified building the operational capabilities to manage it. The next decade's question is whether the return premium is durable as dry powder accumulates, holding periods extend, and the asset class faces its first severe market stress since going fully mainstream.