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These pension funds made a killing with private equity

Amy Riley | E+ | Getty Images

Private equity has been a winning bet for large public pensions, according to a new study.

Private equity delivered a 10 percent median annualized return to 146 public pension managing more than $1 billion over the last 10 years, according to a new report from industry trade association The Private Equity Growth Capital Council.

By comparison, the pensions earned a 6.5 percent annualized return on their total investments during the same period. Private equity also outperformed other investments, including stocks (5.8 percent); bonds (6.6 percent); and real estate (6.7 percent), according to the study.

Private equity is a bright spot in an otherwise troubled landscape for public pensions. Still hurt by the financial crisis, public plans are only 73 percent funded as of 2012, according to the Boston College Center for Retirement Research.

The Massachusetts Pension Reserves Investment Trust Fund earned the top rate of return from its PE portfolio with 15.4 percent annualized returns over 10 years.

Other top pension PE players over the same period were the Teacher Retirement System of Texas (15.5 percent); the Houston Firefighters' Relief and Retirement Fund (13.6 percent); the Minnesota State Board of Investment (14.4 percent); and the Iowa Public Employees' Retirement System (14.1 percent).

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"We're delighted. It's a testament not only to the current staff, but to the legacy of those who launched and built a long-term track record second to none," said Michael Trotsky, executive director and chief investment officer for the Massachusetts pension.

"Private equity is an important asset class. It provides diversification and has been a leading contributor to our high returns since the mid-1980s."

Trotsky said the pension has about 10 percent of its money in PE—around the national average for large public retirement funds—and has no plans to change that. The state used 103 different PE firms as last year, including The Blackstone Group, Kohlberg Kravis Roberts and Bain Capital.

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The PEGCC study also ranked pensions with the largest allocations to private equity.

The biggest is the California Public Employees'Retirement System, with $34.2 billion invested. Other huge allocators include the California State Teachers' Retirement System ($22.6 billion); the Washington State Department of Retirement Systems ($16.1 billion); the New York State and Local Retirement System ($14.9 billion); and the Oregon Public Employees Retirement System ($14.1 billion).

"Time and again private equity has proven that it's the single best asset class for public pensions, by delivering superior returns over long time horizons," Steve Judge, president and CEO of the PEGCC, said in a statement.

"Private equity continues to strengthen the retirement security of the millions of American police officers, firefighters, teachers and administrators who rely on hard-earned pension benefits. There is no doubt that private equity returns are essential to improving the pension funding equation."

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.

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