The race is on for fresh capital, especially from giant North American pension funds. At the Buyouts New York conference this week, it was clear from several speakers that fundraising – who has money to invest and who will get it – was the key concern among attendees.
Many panelists pointed out that pension funds were looking to boost their returns, especially given staggering unfunded liabilities. Having lost so much during the financial crisis, pension funds are increasingly looking to private equity and other alternative investments to “catch up.”
So, without further delay, below is an outlook for private equity spending by ten of North America’s biggest public pension funds.
[slideshow]
[slide title=”10 – Massachusetts Pension Reserves Investment Mgmt-‘MassPRIM‘”]
Massachusetts Pension Reserves Investment Management
Total Assets (Most Recent Figure): $48.3 billion (Dec. 31, 2011)
Actual Allocation to Private Equity/Alternatives: 10.6%
Value of Private Equity/Alternative Investments: $5.1 billion
Target Allocation to Private Equity: 10%
Plans for the Year: The board of Mass PRIM, seeing how successful the pension was in 2010 with its private equity program returning 17.1 percent, decided to green-light an additional $1 billion in private equity commitments in 2011, despite the fact the fund is already over its 10 percent private equity allocation target.
[slide title=”9 – Oregon Public Employees’ Retirement System – ‘OPERS’“]
Oregon Public Employees’ Retirement System
Total Assets (Most Recent Figure): $57.7 billion (Feb. 28, 2010)
Actual Allocation to Private Equity/Alternatives: 21.3%
Value of Private Equity/Alternative Investments: $12 billion
Target Allocation to Private Equity: 16%
Plans for the Year: Unlike Washington, which reduced its level of PE commitments in 2010, Oregon raised the amount committed in 2010 to $2.2 billion from $800 million in 2009. In part, this was to keep pace with the flow distributions. With a very respectable 16 percent annual return for its private equity program over the last 30 years, Oregon shows no signs of letting up. Even though it is more than 5 percent over its private equity allocation target, Oregon announced earlier this year that it planned to commit $2 billion a year to private equity in 2011 and 2012, $2.3 billion in 2013 and 2014, and $2.5 billion in 2015 and 2016.
[slide title=”8 – New Jersey State Investment Council“]
New Jersey State Investment Council
Total Assets (Most Recent Figure): $72.6 billion (Feb. 28, 2011)
Actual Allocation to Private Equity/Alternatives: 6.4%
Value of Private Equity/Alternative Investments: $4.6 billion
Target Allocation to Private Equity: The cap on alternative investments (PE, Hedge Funds and Real Estate) may soon rise to 38% from the current 28%.
Plans for the Year: Facing a huge unfunded liability of $53.9 billion, or 46% of the pension’s overall expected obligations, New Jersey’s Investment Council is moving swiftly to raise the maximum that can be allocated to alternative investments, such as private equity, to 38 percent (from 28 percent) in an effort to pick up some of the slack. Currently, the overall alternatives portfolio makes up 17 percent of the fund’s overall assets. The rule change is likely to pass in May, so it is possible that allocations to alternatives could rise soon after that.
[slide title=”7 – Washington State Investment Board“]
Washington State Investment Board
Total Assets (Most Recent Figure): $79.4 billion overall (Dec. 31, 2010)
Actual Allocation to Private Equity/Alternatives: 25% of main $58.8 billion pension fund
Value of Private Equity/Alternative Investments: $14.7 billion
Target Allocation to Private Equity: N/A
Plans for the Year: Washington State has, proportionally, one of the nation’s largest PE programs, with a mega-sized 25 percent portion of assets invested in the asset class. Because it has performed so well for Washington, private equity is overrepresented in the portfolio. As a consequence, Washington has been easing up on fresh commitments, with only $900 million committed in FY2010, vs. $2.2 billion committed in 2009. Nevertheless, Washington did commit a big $500 million check earlier this year to KKR’s newest fund.
[slide title=”6 – Teacher Retirement System of Texas – a.k.a. ‘Texas Teachers’“]
Teacher Retirement System of Texas
Total Assets (Most Recent Figure): $105.3 billion (Dec. 31, 2010)
Actual Allocation to Private Equity/Alternatives: 8.9%
Value of Private Equity/Alternative Investments: $9.4 billion
Target Allocation to Private Equity: 10%
Plans for the Year: As Texas Teachers prepares for Brian Guthrie to replace Ronnie Jung as executive director, the fund’s private equity program saw a Texas-sized 19.4 percent return in 2010. Add that to an impressive 19.7 percent average annual return for the fund’s private equity program over the last 20 years. Despite those returns, the fund is actually underweight in private equity, so look for more money to be committed in the second half of the year.
[slide title=”5 – Ontario Teachers’ Pension Plan“]
Ontario Teachers’ Pension Plan
Total Assets (Most Recent Figure): $111.5 billion (Dec. 31, 2010)
Actual Allocation to Private Equity/Alternatives: 11.2%
Value of Private Equity/Alternative Investments: $12.4 billion
Target Allocation to Private Equity: N/A
Plans for the Year: The Ontario Teachers’ in-house private equity firm has $12.4 billion under management and makes its own direct private investments, often in concert with other Canadian pensions or with other private equity firms. For the last 20 years, the returns for the private capital group of the pension has been an extremely respectable 18.5 percent. Recently, OTPP announced that it would try to dispose of its majority stake in the Toronto Maple Leafs hockey team and the Toronto Raptors of the NBA. That a pension fund would hold direct stakes such as these, and has such a strong record doing so, indicates that the do-it-yourself Canadian system is working well. The pension has also become one of the leaders in ultra-long-term direct investments in infrastructure.
[slide title=”4 – New York City Retirement Systems“]
New York City Retirement Systems
Total Assets (Most Recent Figure): $115 billion (Jan. 31, 2011)
Actual Allocation to Private Equity/Alternatives: 5.8%
Value of Private Equity/Alternative Investments: $6.7 billion
Target Allocation to Private Equity: N/A
Plans for the Year: Led by former PE executive Larry Schloss, New York City’s five pensions have in charge someone who knows the PE space. In a Buyouts interview earlier this year, Schloss said in order to keep a $12 billion portfolio (in committed capital) reasonably static, the pensions he manages will have to add about $1.5 billion to $2 billion in new commitments a year. Given that New York has not made any big ticket commitments thus far in 2011, keep an eye out for new commitments toward the second half of the year.
[slide title=”3 – Florida Retirement System Pension Plan“]
Florida Retirement System Pension Plan
Total Assets (Most Recent Figure): $124.2 billion (Dec. 31, 2010)
Actual Allocation to Private Equity/Alternatives: 4%
Value of Private Equity/Alternative Investments: $5.1 billion
Target Allocation to Private Equity: 5%
Plans for the Year: Florida is moving to raise the allocation target for private equity to 5 percent from 4 percent. The current portfolio is 4 percent invested in private equity. The system also has a 7 percent cap on PE.
[slide title=”2 – California State Teachers’ Retirement System – ‘CalSTRS’“]
California State Teachers’ Retirement System
Total Assets (Most Recent Figure): $150 billion (Feb. 28, 2011)
Actual Allocation to Private Equity/Alternatives: 13.4%
Value of Private Equity/Alternative Investments: $20 billion
Target Allocation to Private Equity: 12%
Plans for the Year: CalSTRS’s private equity program, led by new PE Director Margot Wirth and CIO Christopher Ailman, saw a return of 17.2 percent for the year ending Sept. 30th. The fund is being managed under a new asset allocation plan that aims to better protect the pension from market upheavals like the financial crisis, when all asset classes seemed to correlate in one direction – down. The pension’s private equity investments, at 13.4 percent of the portfolio, are slightly over its 12 percent target rate, making it less likely that CalSTRS will be in a hurry to make very large ticket commitments. Although CalSTRS recently announced its unfunded liabilities amounted to $56 billion, the pension was still chosen as large public fund investor of the year from Institutional Investor magazine.
[slide title=”1- California Public Employees’ Retirement System – ‘CalPERS’“]
California Public Employees’ Retirement System
Total Assets (Most Recent Figure): $228 billion (Jan. 31, 2011)
Actual Allocation to Private Equity/Alternatives: 14.1%
Value of Private Equity/Alternative Investments: $32.2 billion
Target Allocation to Private Equity: 14%
Plans for the Year: CalPERS is currently wrapping up its search for a new senior alternative investment officer, following the resignation nearly a year ago of Leon Shahinian in the aftermath of the pension’s placement agent scandal. Much decision-making has been on hold awaiting the new appointment. In the interim, the alternative program has been directly overseen by Joe Dear, CalPERS’s chief investment officer. While there haven’t been any very large-ticket commitments of late, there has been an unconfirmed sale of an $800 million tranche of PE assets on the secondary market. Such a sale could be seen as a way to free up funds so the new private equity manager has a freer hand. A spokesman for CalPERS said the giant pension is exactly at its target allocation, 14 percent, but with PE distributions coming back to CalPERS, the pension would need to make some large commitments in the second half of 2011 just to maintain its current PE allocation. CalPERS will also likely use its clout with PE firms to gain access to co-investment opportunities. CalPERS is also likely to continue to own large direct stakes in several private equity firms, including Apollo, Carlyle and Silver Lake.
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