Why Invest in Private Equity?

reallocating funds. So why does PGGM choose to invest part of the capital entrusted to us in private equity? In this blog, we explain why private equity is a vital part of our strategy and how it benefits the participants of our client. 

What is Private Equity?
At PGGM, a large share of our managed equity portfolio is invested in publicly listed companies (public equity). However, as a significant part of the global economy is privately financed, private equity plays a crucial role in our strategy. It allows us to access to privately held companies, whether they are in the early stages of development or no longer, or not yet, publicly traded.

Currently, we have approximately €22 billion (about 9% of our portfolio) invested in private equity. Our focus is on companies in technology, healthcare, consumer goods, industry, and financial services. While private investments are less liquid, they present both challenges and opportunities.

Strong Returns with Lower Risk
One of the main reasons to invest in private equity is diversification. Compared to traditional publicly listed stocks, private equity investments tend to be less volatile and have a lower correlation with public markets, leading to better risk-adjusted returns for the portfolio.

Performance is another key driver. Over the past decade, our private equity portfolio has delivered an average return of 14%, significantly contributing to the pensions of the participants of our client. This success is partly due to the active approach of our fund managers, who often take controlling stakes in companies. This allows them to influence strategic decisions and operations, improve business processes, enhance efficiency, and create value.

Co-Investments as a Strategic Advantage
While most of our managed pirvate equity capital is invested in funds, we are increasingly invited by our fund managers to co-invest, allowing us to take direct stakes in companies. This enables us to make more targeted investment decisions while reducing costs.

A good example of this approach is our co-investment with L Catterton in Birkenstock. By shifting the brand’s focus to a broader and more fashionable customer segment, the company significantly increased its value, leading to a successful IPO in 2023—and delivering strong returns for us. Additionally, our investment in Infinitas Learning, alongside NPM Capital, has supported the company’s growth and digitalisation, allowing us to create both financial and societal value.

Also a Strong Focus on Sustainability
Sustainability is a core element of our private equity strategy. We aim to generate financial value while also having a positive impact on the environment and society. We work closely with our fund managers to promote sustainable business practices by integrating environmental, social, and governance (ESG) goals into our investment selection process. Additionally, we target investments in products and services that align with PFZW’s sustainability themes.

A good example is our investment in Essange Reagents, a Dutch company that develops and produces diagnostic reagents, enabling millions of diagnostic tests worldwide. This €18 million co-investment with Gilde Healthcare Partners contributes to the United Nations Sustainable Development Goals (SDGs) 3 and 8, which focus on healthcare and economic growth.

The Long-Term Nature of Private Equity
A key characteristic of private equity is its long investment horizon. When fund managers acquire a company, they take time to transform it before eventually selling or taking it public. This means we must be patient, as profits are not realised quickly. However, this long-term approach allows us to support companies through challenging periods while creating long-term value.

Because private equity investments are not traded daily, we must wait for fund managers to exit their investments. However, the higher returns—including the illiquidity premium—compensate for this, making private equity an attractive long-term investment.

Managing Costs
Private equity involves higher costs, mainly due to performance fees (carried interest). Fund managers typically receive a management fee of 1.5–2% and a performance fee of 20% on value appreciation. This profit-sharing structure reflects the intensive management required, which is significantly more hands-on compared to publicly listed investments. When acquiring a company, fund managers usually take a controlling stake, actively engaging in governance, operations, and strategic changes—they are essentially "in the kitchen" of the company.

At PGGM, we are highly focused on cost efficiency. We negotiate management fees and leverage co-investments, where we invest directly without management fees or performance sharing.

Conclusion
Private equity is a valuable part of our investment strategy, delivering strong financial returns while supporting sustainable growth. By investing in privately held companies with significant growth potential, we support businesses while generating solid returns.

Additionally, sustainability is integrated into our investment process and, through our fund managers, we actively influence the long-term strategies of the companies we invest in. By selecting the best managers and engaging in co-investments, we build a strong investment portfolio that contributes to a secure and reliable pension for the participants of our client.