Connecticut looks to Europe, shorter-duration funds as it ramps up PE pacing

Connecticut Retirement Plans and Trust Fund plans to increase its private equity pacing by $200 million for the next two years, using the allocations to balance its portfolio towards Europe and shorter-duration opportunities in private credit, mezzanine, opportunistic and secondaries strategies.

The $34 billion CRPTF has a 7.4 percent allocation to private investment, as of January 2019, falling outside of its target range of 8 to 14 percent. The pension fund’s strategic plan calls for $750 million in annual commitments, and the pension has added a new “transition plan” to help close the gap, with $200 million in additional commitments in each of 2020 and 2021, according to documents from Connecticut’s March 13 meeting.

The transition plan will be funded with net cash flows generated by current private equity investments. It will focus on strategies with shorter investment periods and durations of three to four years, including private credit, mezzanine, opportunistic and secondaries strategies, according to a review prepared by private equity consultant StepStone Group.

The longer-term strategic plan, at $750 million a year, aims to reshape a portfolio that has a heavy bias toward North America and a relatively high concentration in venture capital.

Connecticut’s private equity portfolio has a 98.6 percent exposure to North America. StepStone recommended cutting that down to 78 percent. Europe would be the big winner in the strategic plan, going from 0.8 percent to 18.6 percent, while investments in Asia, Africa and Latin America would rise from 0.6 percent to 3.4 percent.

While the pension fund’s exposure to buyouts would remain more or less unchanged, with a long-term target of 57.5 percent, it would cut its venture capital allocation in half, from 24 percent to 12 percent.

The reduction in venture capital would make room for more mezzanine, secondaries and growth investments.

Secondaries would see the largest jump, going from 2.8 percent to 8.1 percent. Connecticut would also cut back slightly on distressed investing opportunities, but would maintain an 8.6 percent target.

CRPTF has has fallen short of its PE commitment pacing in most recent years, with the exception of 2017. Over the longer term, Connecticut has had highly inconsistent pacing, with lows including $25 million committed in 2014 and $40 million in 2004, and highs of $945 million in 2007 and $545 million in 2005.

Connecticut’s strategic plan also calls for a focus on co-investment and secondaries purchase opportunities generated from its existing private equity relationships. The state will also consider selling interests in funds managed by “discontinued” managers on the secondary market, according to StepStone’s presentation.

Connecticut will also continue to focus on in-state opportunities through its Connecticut Horizon Fund, and will work on identifying new and emerging firms for its Horizon Fund and its overall PE portfolio.

Connecticut has already stepped up its commitment pace with more than $375 million committed between October 2018 and January 2019, according to meeting materials.

Those recent commitments include:

• $50 million to Balance Point Capital Partners III, which closed on $380 million in October;
• €75 million to ICG Europe Fund VII, which has a target of size of 4 billion euros ($4.69 billion);
• $100 million to Vista Equity Partners Fund VII;
• $100 million to Fairview Capital Partners Constitution Fund V, which invests in underlying venture capital and growth stage funds;
• $50 million to Freeman CT Horizon Fund.

Connecticut is seeking a consultant for its alternative investment fund, which accounts for 8.1 percent of its retirement assets. The contract of its current consultant, Cliffwater, expires at the end of May 2019, and Connecticut expects to have a new contract in place by then.

Semi-finalists will be interviewed in April, and the Treasurer will recommend a finalist to the investment advisory committee on May 8. Connecticut’s alternatives portfolio includes hedge funds, real assets and opportunistic investments, and Connecticut plans to commit $500 million to the portfolio during each of the next three years before dropping its commitment pacing to $350 million annually.

Action Item: View Connecticut’s latest quarterly private investment report here https://bit.ly/2UJMIsR