Georgia On My Mind…

And then there was one…

Earlier this month, the Tennessee Consolidated Retirement System made its first-ever dip into private equity waters, committing a total of $150 million to funds managed by Hellman & Friedman, Khosla Ventures and TA Associates. The moves came approximately one year after the Tennessee legislature voted to approve alternative asset commitments, making Tennessee the 49th state with such flexibility.

The lone holdout is Georgia, which doesn’t make alternative investments out of either its public employees’ pension system (ERSGA) or its State Treasury. I know that it’s a deep red state, but this seems to be taking conservatism a bit too seriously.

Bloomberg had a story last week about how alternative investments had hamstrung public pension systems in states like Oregon and Washington, due to outsized mega-fund commitments and disappearing distributions. All accurate, no doubt, but it also correctly pointed out that, over time, PE return benchmarks almost always beat public equities indices. For example, the Washington State Investment Board told Bloomberg that its buyout portfolio produced an 8.2% average annual gain over the past decade, compared to a 3.9% drop in the S&P 500.

My basic point, therefore, is that Georgia is not doing its beneficiaries any favors. I’m not saying it should ramp up to a 15% allocation, or even a 10% allocation. But why not follow the Tennessee model, which is limited to the more traditional 5% ceiling? Isn’t diversification supposed to do a portfolio good?

Again, this isn’t to say that Georgia must invest 5% of its monies in buyout and venture capital funds. Just that it should give itself the option. Alabama and Maine, for example, have virtually no alternative investments, but both have the flexibility to make some.

I’ve put in calls to reps of both ERSGA and the Georgia State Treasurer’s office, and will update this post if I hear back. I’m sure they have some rationale for why Georgia sits alone on this issue, but I can’t think of one that makes much sense.