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Three PE Programs Off To Modest Starts

Unspectacular ReturnsInvestment Multiples On Private Equity PortfoliosNew Jersey State Investment Council: 1.11x as of May 31

Texas County & District Retirement System: 1.05x as of Dec. 31

Public Employee Retirement System of Idaho: 1.18x as of Sept. 30

Source: Financial Reports

It’s not often that I come across a stash of private-equity return data from a fresh source. But over the last month or so I’ve come across three, all public pension funds that are off to modest starts on young, diversified portfolios.

Three three are New Jersey State Investment Council, Texas County & District Retirement System and Public Employee Retirement System of Idaho. All told we know of some dozen U.S. pensions that make their return data easily accessible, such as by posting it on their Web sites.

The largest of the three is the 77-fund portfolio managed by New Jersey State Investment Council. As of May 31, the state’s relatively new private equity portfolio (most commitments date from mid-2005 to late 2008) is off to a modestly good start. That’s especially true for a portfolio that ramped up heavily right before the financial crisis and that is still being victimized by the J-curve effect (in which high management fees sap returns in the early life of a limited partnership).

New Jersey’s best-performing category of private equity, not surprisingly, is distressed debt, generating a 1.26x total value multiple and representing 11.5 percent of its private equity commitments. That’s followed, in order of performance, by secondaries (1.18x, 3.2 percent); domestic mid-market buyout (1.14x, 21.9 percent), mezzanine debt (1.11x, 6.9 percent), large buyouts (1.09x, 20.9 percent), venture capital (1.07x, 2.3 percent), co-investments (1.05x, 5.7 percent), small/mid-sized buyouts (1.05x, 7.4 percent), emerging managers (.99x, 4.6 percent) and international (.99x, 15.5 percent).

The New Jersey State Investment Council, which faces a significant unfunded liability gap for the pension funds it manages, appears to be looking to alternative investments as one way to meet its obligations. Earlier this year, the state raised its allocation cap on alternative investments—including private equity, hedge funds, real estate and commodities—to a lofty 38 percent. It’s not clear exactly how that will impact the council’s $5 billion in private equity investments, which recently represented 6.8 percent of the $73 billion total asset pool. But the state’s recent decision to commit $600 million to three private equity funds suggests its allocation to the asset class is heading higher.

The 65-fund Texas Country & District portfolio, the second largest of the trio, stretches from vintage 2006 to vintage 2011, and includes buyout, energy, mezzanine, venture capital and non-U.S. funds. The results, like those in New Jersey, are modest to date. Not a big surprise for a fund launched near a market peak and one still suffering from the J-curve effect. With $1.9 billion committed, and $674.6 million (or just over a third) drawn down, the portfolio as a whole has posted, as of year-end, a 3.08 percent net IRR and a 1.05x total value investment multiple.

For now, its energy funds are leading the way in performance, with a 9.53 percent net IRR and 1.17x investment multiple, followed by mezzanine (6.45 percent; 1.11x), venture capital (2.43 percent, 1.04x), buyout (2.26 percent, 1.04x) and non-U.S. (-1.09 percent, .98x).

The smallest portfolio comes from Public Employee Retirement System of Idaho. As with New Jersey and Texas County, the Idaho private equity portfolio is relatively young, relatively small, and it has yet to hit the lights out on performance. That more than 90 percent of its paid-in capital dates from vintage 2007 funds or older (more resistant to the J-curve effect) suggests that Idaho may have a less than spectacular portfolio on its hands.

Including a small legacy portfolio and a small liquidated portfolio, Idaho has seen $1.4 billion drawn down by its private equity fund managers, as of Sept. 30. As of that date it had achieved a 1.18x investment multiple and net IRR of 6.31 percent. The 54-fund active portfolio at Idaho Public Employee stretches from vintage 1996 to vintage 2011 and includes buyout, venture capital, growth equity, distressed debt, co-investments and secondaries.

Many public pension funds are no doubt looking to high-risk, high-return asset classes like private equity to help fill their unfunded liability gaps. The early returns on these private equity portfolios in New Jersey, Texas County and Idaho suggest exposure to the asset class is no cure-all.