LP corner, week of June 21, 2010

Lower returns haven’t swayed LPs

Limited partners still feel confident about the private equity asset class, even though more than half of them now have “lifetime portfolio returns of 10% or less,” according to Coller Capital’s most recent Global Private Equity Barometer.

The survey found that only 22% of LPs currently have net private equity returns of 16% or higher, compared to 37% that did so in 2009. A total of 45% of LPs had returns that high in the summer of 2007, according to the twice-yearly survey.

Despite the less-than-stellar returns, 20% of the LPs surveyed by Coller Capital this spring said they intended to raise the portion of their portfolios dedicated to private equity, while only 13% intend to decrease it. The finding is the opposite of last summer’s survey result, wherein more LPs aimed to trim their private equity portfolios rather than expand them—a first-ever occurrence, according to the survey.

In more good news for general partners, 64% of LPs surveyed said they anticipate revving up their commitment pace to private equity during the next 18 months.

On the downside for managers, however, 38% of North American LPs plan to shrink the number of relationships they have with GPs during the next two years.

And in a trend that could ultimately mean less business for managers, more and more LPs in the past several years have been making investments directly in companies. About half of the LPs surveyed said they are making direct investments today, compared to only 35% in 2006, and 23% of those direct investments are proprietary, meaning LPs are making them on their own, not via a co-investment fund or program.

Plus, during the next three years, 41% of those surveyed expect to grow their direct investment practices. —Nancy Gordon

Illinois Teachers hires emerging manager head

The $32 billion Teachers’ Retirement System of the State of Illinois recently hired an investment officer to administer its emerging managers program, which includes private equity as well as other asset classes.

Kenyatta Matheny started at his new post on May 17. He previously was with the Federal Reserve Bank of Chicago, where he served as a financial markets manager of central bank services.

Illinois Teachers’ created its emerging managers program in 2005 to commit $500 million to new or expanding investment management firms—especially minority-owned, female-owned and Illinois-based companies. The program added private equity, real estate and absolute return asset classes in 2008.

So far, in the private equity portion of the program, the plan sponsor has committed $25 million to Clearlake Capital Partners II, managed by Clearlake Capital Partners, which takes control positions in small and mid-sized North American companies; up to $25 million to Maranon Mezzanine Fund, a vehicle of senior and sub-debt lender Maranon Capital; and $15 million to StarVest Partners II, run by StarVest Partners, a technology-focused, woman-owned venture capital shop.

The goal is ultimately to have 10 percent of the emerging manager program allocated to private equity.

In other news, the pension fund is still in the process of looking for a new private equity consultant and expects the search to come to a close later this month. The current consultant, Pacific Corporate Group, was allowed to re-bid for the position.

Also, the limited partner will soon begin a search for an adviser to help it start a private equity co-investment program. “No amount of money has been dedicated yet to the program,” a spokesperson said. “That will be determined once an adviser is in place. We anticipate, however, that the program will start in September.” —Nancy Gordon

Newcomer Tennessee looks for PE consultant

The Tennessee Consolidated Retirement System, which broke into the asset class only last year, recently issued an RFP for a private equity consultant to help the state identify private equity partnerships and managers.

Strategic Investment Solutions (SIS) serves as the private equity consultant for the state pension fund, but its contract expires this year. SIS is permitted re-bid for the post. The deadline for the state to receive proposals was June 11, with the new five-year contract expected to be signed in July.

The LP’s investment policy permits it to commit to domestic and international buyout, venture capital, mezzanine, distressed debt, special situations and secondary funds. It can invest in limited partnerships, private placements, co-investments, funds of funds and other commingled funds.

The $29 billion state pension fund did not receive permission to invest in private equity until 2008, and did not make its first commitment to the asset class until 2009. So far, the state has pledged to funds managed by Draper Fisher Jurvetson, Hellman & Friedman, Khosla Ventures, Oaktree Capital and TA Associates. —Nancy Gordon

Montana pledges $50M

The Montana Board of Investments recently promised $25 million each to distressed debt and energy-focused fund managers as the $6 billion pension fund approaches its 12% target to private equity.

Greenwich, Conn.-based Black Diamond Capital Management will use its capital slug from Montana to make distressed debt investments through its latest fund, BDCM Opportunity Fund III. The firm provides debt and equity for mid-market buyout, project finance, startup and real estate deals.

Meanwhile, Energy Investors Funds’ $25 million commitment will go to its United States Power Fund IV vehicle, which is earmarked to invest in sectors including electricity generation and transmission, as well as other energy-related services. The firm, which has offices in Boston, New York and San Francisco, usually takes control stakes and sometimes provides the opportunity to co-invest alongside its funds.

The $6 billion limited partner has a target allocation to private equity of 12%, with a range of 9% to 15 percent. As of April 30, the state pension fund’s actual private equity allocation was approaching 12 percent.

Buyout funds comprise almost half of the LP’s private equity portfolio, with the remainder split among the venture capital, distressed, special situations and mezzanine subgroups.

Although the program commits mostly to direct private equity funds, it also steers capital to funds of funds and secondary vehicles. However, according to a pension fund document, Montana will, in the future, likely limit its use of funds-of-funds managers to accessing international private equity and domestic venture capital, and will probably make fewer secondary commitments. —Nancy Gordon