Connecticut State Looks To Pare BackFund Commitments –

The State of Connecticut Treasury Department has begun renegotiating its position in at least six buyout partnerships because it believes it is overexposed to alternative assets.

The case may mark the first example of a limited partner looking to pare back partnership commitments across the board.

The $18.5 billion pension, for now, is trying to reduce buyout, venture capital and real estate commitments it made in the fourth quarter, but it may soon approach other partnerships to which it committed from July 1997 to September 1998.

Connecticut’s aim is to reduce the amount of capital it committed to alternative assets by between $400 million and $600 million in the coming weeks, said Howard Rifkin, deputy treasurer. The pension has $3.56 billion committed to alternatives, more than half in buyout funds.

By all accounts, the situation at Connecticut at the end of 1998 was unusual and created a dilemma for the treasury. In November, Treasurer Paul Silvester lost a close election to Denise Nappier. The treasurer has sole control of the pension, and Mr. Silvester committed $852 million to alternatives in his final three months in office. This move increased the pension’s commitments to alternatives by 25% to an amount equal to 19% of the pension’s funds under management. Connecticut now has 7.5% of its pension invested in alternatives and has an 11% allocation level for the asset class, a percentage the pension will surpass if it does not make reductions in its commitment level, Mr. Rifkin said.

The pension wants to make the reductions now before it is forced to accept discount prices in the secondary market to reduce its exposure, sources at the pension said. Mr. Silvester did not return calls.

Big Appetite Leads to Harsh Measures

Mr. Rifkin defended the move by saying the treasury is fulfilling its fiduciary duty by paring back commitments. He said he believes the pension is in danger because it has too much illiquid capital concentrated in one-and-a-half vintage years-it committed $2.42 billion to alternatives from July 1997 to December 1998-in one asset class.

“I would say, by and large, partnerships have been understanding and have tried to be reasonable because they see us as long-term partners,” he said.

However, Connecticut cannot legally reduce its commitments in any of its buyout or venture capital partnerships without consent except for one in which it has super-majority rights, Mr. Rifkin said, declining to name that partnership. The pension has no plans to default on any of its commitments if it cannot negotiate a solution, he added.

So far, G.P.s had mixed reactions to the unusual move, according to interviews with partners who have been approached by the pension in the last several weeks. Thayer Capital Partners has been the only firm so far to reach an agreement with the pension, while one G.P. from another firm said his group would not negotiate with Connecticut and would not accept a commitment from the pension when it raises its next partnership.

In the last quarter of 1998, Connecticut committed $475 million to buyout partnerships. The list includes $200 million to mezzanine and equity investor Triumph Capital Group, $75 million to Thayer, $50 million to The Carlyle Group’s Asia fund, $50 million to Greenwich Street Capital Partners, $50 million to Landmark Partners (to increase its overall commitment to Landmark Partners VIII, L.P. to $150 million) and $25 million to Veritas Capital (increasing its overall commitment to Veritas Capital Fund, L.P. to $125 million).

Thayer Takes a Bold Step

Thayer Capital Partners in April possibly became the first buyout firm to allow an L.P. to pare back its commitment. The firm helped Connecticut transfer about $25 million of its $75 million commitment to another investor in the $880 million Thayer Equity Investors IV, L.P., Mr. Rifkin said.

The firm said it could accommodate the pension because it recently pared back commitments from other L.P.s in its fund, and it could find an existing partner that wanted to acquire Connecticut’s unfunded stake in a straight swap, said Frederic Malek, a Thayer partner. “Connecticut just sat down and said this is our new policy and we realize anything you do will be voluntary, and we did what we could,” he said. “I think as a partner, we were open to help them but not to reduce the amount of the partnership.”

The Treasury now is starting to negotiate with Greenwich Street and Carlyle, and sources said both firms would like to help. Part of the incentive for Greenwich Street is that its parent, Citigroup, has headquarters in the state and would likely want to maintain good relations with the Treasurer’s office.

However, not every G.P. will be helpful. One G.P., who declined to be identified, related a nightmarish story.

The partner said Connecticut recently called the firm to set up an introductory meeting so the new Treasurer could meet the group. Without a hint of what was in store, officials at the pension told the general partner they wanted the firm to give back part of the commitment. “My feeling was anger and outrage that the new Treasurer did not know who we were and was going to do this,” the G.P. said.

Soon, the G.P. requested another meeting with the pension and was turned down without an explanation.

In response, the G.P. now says his firm will not negotiate with the pension and has no desire to ever work with it again after the firm invests the pension’s entire commitment.

Mr. Rifkin said the Treasurer’s office has not treated any G.P. in that fashion.

Another G.P., who received a commitment from the pension in 1997, said his firm would not negotiate if approached.

“It is the same as me going to Connecticut and telling them that we’ve done very well and need to change the carried interest spilt to 70%/30%,” the G.P. said.

As for Connecticut, it would still have the option of selling its commitments in the secondary market if it cannot reach agreements with the firms, Mr. Rifkin said.

Although secondary investors might be hesitant to acquire unfunded commitments, they might be interested in buying a funded and unfunded stake together at full price. In this manner, the secondary investor could reap the benefits of investments already made and help the pension quickly reduce its commitment level, an intermediary said.

Connecticut’s Reputation Is at Stake

Sources said Connecticut already had been gaining the reputation of an L.P. that G.P.s do not want in their partnerships.

Connecticut is known for being a tough negotiator. Additionally, the pension in 1997 scaled back its soft commitment to Kohlberg Kravis Roberts & Co. from $150 million to $50 million, and it threw another G.P. for a loop the same year.

“They made a significant commitment, and they pulled out at the last minute because of a political makeover,” a source who worked closely with the firm that lost the commitment said.

Connecticut has had three Treasurers in the last five years, creating disruption at the pension.

However, Connecticut believes G.P.s will understand the current situation. “I think that we hopefully will do a good job of getting our story out, and G.P.s will see this as an extraordinary circumstance and realize that this is not the way we would like to behave,” Mr. Rifkin said.