The state of Connecticut’s tempest-tossed private equity portfolio, lashed by scandals, bad bets and a hiatus from new commitments a decade ago, hasn’t performed as badly as you might think, although at least one secondary sale may mask some of the results.
As of March 31 the $2.2 billion portfolio, with investments dating from 1987 to 2011, is showing a respectable return of a 1.4x investment multiple and 8.5 percent net IRR, according to a report by adviser Franklin Park. Among major sub-allocations, its $1.1 billion portfolio of buyout funds has generated a 1.4x investment multiple and a 7.7 percent net IRR; its $421 million venture capital portfolio has generated a 1.5x investment multiple and a 12.8 percent net IRR.
Flash back 10 years and it’s hard to imagine a more troubled program. In 1999 Paul Silvester, the ex-treasurer of the state, pleaded guilty to racketeering charges for making a flurry of pension-fund commitments to several private-equity firms in exchange for payments directed to himself or associates.
One of the first big tasks for Silvester’s successor, Denise Nappier, who still holds the post, was to clean up the mess, including trying to recover commitments made fraudulently. She also filed suit in 2002 against New York buyout shop Forstmann Little & Co., accusing the firm of mismanaging its money in vain attempts to save two failing telecom companies, XO Communications Inc. and McLeodUSA Inc.
Nappier, who manages the roughly $25 billion Connecticut Retirement Plans and Trust Funds, placed a moratorium on new private equity commitments that lasted some three and a half years from roughly 1999 to 2002. According to the report prepared by adviser Franklin Park, the state didn’t make a single commitment to a vintage 2000 or vintage 2001 fund. In 2004 Connecticut sold stakes in funds managed by Triumph Capital, implicated in the Silvester scandal, to Coller Capital, and it may well have sold other holdings over time.
The pension fund has had its share of clunkers, including a $130 million commitment to the 1998 mezzanine fund Forstmann Little VII and a $70 million commitment to the 1999 buyout fund Forstmann Little VI. Both fall in the bottom five of the 79-fund portfolio based on net IRR. In fact, the $15.5 million that Forstmann Little paid to the state to drop its appeal (after a guilty verdict for breach of contract but no award of damages) barely made a dent in the state’s losses in the two funds, which totaled more than $100 million.
Ironically, it was an early and big bet on venture capital funds, so out of favor now with institutional investors, that helped keep overall portfolio returns respectable. From 1987 to roughly 2002 adviser Crossroads Group (which later became a division of Lehman Brothers, then NB Private Equity Partners) built a portfolio of $640 million in commitments to more than 75 venture capital funds, including Accel Partners and Matrix Partners, according to Dow Jones. As of March 31, those funds have returned a 2.6x investment multiple and generated a 20.2 percent IRR, according to the Franklin Park report. The $1.2 billion in distributions from this single portfolio, called “Constitution Liquidating” on the report, accounts for nearly a quarter of the pension’s total distributions to date (from funds listed on the Franklin Park report).
A troubled past hasn’t chased Connecticut from the asset class. The state has made at least two commitments to 2011 vintage funds, according to the report—$75 million to mezzanine fund Audax Mezzanine III and $75 million to a buyout fund Wellspring V.
An executive at Franklin Park referred me to the state pension fund for comment; a spokesperson for the pension fund said he would be unable to respond to my questions by press time.
The slideshow below shows the top-5 and bottom-5 performing funds for the portfolio, by net IRR, presented in the Franklin Park report. I was unsuccessful in attempts to confirm the performance of the bottom 5 with the GPs themselves.
David M. Toll is editor-in-charge of sister magazine Buyouts.