Investors can expect annual returns from private-investment funds of less than 10% in the future, below the 20%-plus that many of them delivered in past years, she predicted.

Calstrs chief investment officer Christopher Ailman is uninspired and under-invested. The second-largest U.S. pension had 9.3% of its $242.1 billion of assets in private equity as of Sept. 30, an allocation it plans to raise to 13% eventually. But Ailman is in no rush.

“Everybody is trying to chase what they perceive as the cream of the crop in private equity,” he said in a Bloomberg TV interview in November. “The median private equity portfolio return or GP return is usually actually equal or less than what you can get in public stocks.”

This is borne out by findings from Nicolas Rabener. The managing director of FactorResearch created an index of the smallest small-cap stocks and discovered in research last year that they performed in line with the U.S. Private Equity Index.

‘Through the Roof’
Interest in buying the equity and debt of unlisted companies, property and infrastructure has surged as the yields of $12 trillion of bonds globally fall below zero.

JPMorgan Asset Management recently touted such alternatives as a way to offset falling returns faced by traditional fund managers with 60% allocations in equity and 40% in bonds. Its strategists in November upgraded their forecast for private equity investments over a 10-15 year horizon to 8.8% from 8.25%.

And in the Nordic region, a growing number of pension funds are reworking their models to ramp up private-equity allocations.

Yet the reward for buying unlisted and hard-to-sell securities is becoming more elusive as fears over late-cycle economic risks spread.

At Hermes GPE, Peter Gale is seeking investments in fast-growing companies unfettered by the kind of large debt burden that often comes from private-equity led leveraged buyouts.

“Credit conditions are not as good as they used to be and there are so many people in the game,” said the head of private-equity investments. “Valuations have gone through the roof. Returns will have to diminish.”