Imitation has been called the sincerest form of flattery, and if so, pension funds around the world are beginning to show admiration for the private equity funds they have so often invested in. As a recent article from Bloomberg Businessweek explains, in the face of sluggish returns and increased operating costs, pension funds have started acquiring companies and investing in private debt themselves, bypassing the private equity funds and alternative asset managers to whom they typically outsource these investments.

Pension funds, particularly in Canada—such as the Ontario Municipal Employees Retirement System (OMERS) and the Ontario Teachers’ Pension Plan (OTPP)—are forgoing private equity funds to directly acquire small and mid-size businesses. OMERS recently purchased a minority stake in the pet care provider National Veterinary Associates, for example, while OTTP outright purchased PetVet Care Centers several years before that. Although both examples are drawn from the same industry, they illustrate the larger trend that pension funds are now prepared to buy businesses or private debt rather than investing in private equity funds, which would have simply invested in some of these companies and their debt anyway.

Additionally, pension funds are assembling their own teams of experts to identify investment opportunities in sectors like private, middle market loans. These new hires empower pension funds to make their own investments while furthering their transformation into quasi-private equity funds.

According to the Bloomberg article, there are several advantages to this strategy, although the primary benefit is increased returns. Pension funds get to improve their returns by avoiding paying asset management fees to private equity funds—and since private equity’s fees have remained relatively high owing to their spectacular returns of late, this could represent a significant savings.

While this trend has been good news for pension funds so far, private equity funds may need to adjust their own practices if it continues. The Bloomberg article suggests that as the private equity’s stellar returns begin to cool, more and more pension funds will exit to avoid paying fees on lower yields and instead begin to directly invest in private debt and acquire companies on their own; this may prompt private equity funds to begin to lower their fees.