Anand Systla

Job Market Paper

The Smooth Operator: Benefits and Risks of Private Equity NAV Smoothing

Abstract: I show that US public pensions strategically invest in private equity to exploit the appearance of stability created by smoothed net asset value reporting. Using the 2012 GASB 67 and 68 accounting reform as a quasi-exogenous shock to the visibility of pension underfunding, I find that underfunded pensions increased their allocation to private equity and were 19% more likely to select fund managers with a history of stronger return smoothing within four years of the reform. While smoothing offers short-term accounting benefits, it amplifies portfolio allocation risks during market downturns through the "Denominator Effect". When public asset values decline, the relative weight of smoothed PE holdings becomes mechanically inflated, causing overallocation for plans that must maintain portfolio weights within specified bands. This imbalance often forces pensions to liquidate PE holdings in the secondary market at substantial discounts, locking in losses during periods of stress.

Contact Information:

John E. Anderson School of Management

110 Westwood Plaza, Suite C-310

Los Angeles, CA 90095-1481

Email ID: asystla92@g.ucla.edu