US public pensions have boosted their exposure to private equity to $622 billion, the highest in at least two decades, as part of a push for higher investment returns, according to a new report by the Equable Institute.

Private equity makes up 13% of the state and local retirement plans’ investments as of 2022, compared to 11% the prior year, according to the nonprofit research group, which cited the latest data available. Overall, alternative assets — like private equity, hedge funds and real estate — make up about a third of pensions’ portfolios, amounting to a record $1.6 trillion invested, according to the report released Tuesday.

“Public pension asset allocations have shifted away from transparent public equities and relatively safe fixed income investments into riskier categories as trustees search for stronger investment returns,” according to the report by Anthony Randazzo, Equable’s executive director, and Jonathan Moody, its vice president of research.

The retirement funds’ exposure to private assets puts them at risk if valuations are marked down within the space, the report said. The declining value of public equities last year also caused portfolios to skew more heavily to private assets.

Public pensions have seen returns dinged by last year’s stock market rout — though a rally this year has helped prevent a deeper slide in returns. Equable estimates that state and local plans’ will see investment returns of 5.3% on average as of June 30, 2023. That’s below the plans’ expectations for investment returns of 6.9%.

US public pension plans have recently approved new investments in private assets. Connecticut’s state pensions are investing $350 million in two HarbourVest Partners private equity funds after the state treasurer approved those allocations in June. The treasurer signed off on $725 million in private-market commitments at that meeting.

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