Investors plowing cash into private assets may recall the words of Wall Street legend Barton Biggs: There’s no asset class that too much money can’t spoil.

One of the most fertile grounds for funds harvesting returns in a world of negative-yielding bonds and expensive public companies -- private equity -- is being swamped.

Historically high valuations for leveraged buyouts has the likes of Morgan Stanley Wealth Management saying the industry has hit its peak after generating a decade of double-digit returns. That’s put the managers of vast pots of Californian retirement savings in a quandary.

“Returns are coming down,” said Elliot Hentov, head of policy research at State Street Global Advisors. “A lot of money is going into that space and we are seeing excess returns shrinking.”

California Public Employees’ Retirement Systems reported its PE portfolio delivered 7.7% in the fiscal year through June 2019, down from 16.1% in the previous period. The pension giant foresaw a future of shrinking private-equity earnings two years ago, when the board cut targeted margins above the FTSE All World All Cap index to 150 basis points from 300 basis points. The $388 billion asset manager has been examining new PE strategies.

“When you have so much liquidity available, naturally the price for illiquidity will come down,” Calpers Chief Investment Officer Ben Meng said.

Globally, the outperformance of PE over the S&P 500 fell to 1.07 times in 2017 from 1.69 times in 2001, according to data from PitchBook.

With so much money flooding the market, the problem is “how to achieve scale in the asset class in a very competitive, illiquid market environment,” Stephen McCourt, co-CEO of consulting firm Meketa Investment Group, told the Calpers board Nov. 18.

That’s left the biggest asset managers turning away a lot of deals even as they struggle to allocate capital earmarked for PE, according to McCourt, who advises Calpers and the California State Teachers’ Retirement System among others.

“We think we have a reached a peak in the private-equity market,” Morgan Stanley Wealth Chief Investment Officer Lisa Shalett wrote in an Oct. 28 note. “Investors tempted to chase the double-digit returns that many earned in private investment vehicles this past decade need to downgrade their expectations. The environment for private investing has gotten tougher.”

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