A sign of the times: Michigan pension system to stick only with re-ups over next year

State of Michigan Investment Board’s private equity portfolio saw $246 million in cash outflows through the first half of this year.

Many institutional investors have suffered from reduced distributions caused by a sluggish exit market while remaining overallocated to private equity, which is forcing them to slow their commitment pace. Michigan’s private equity portfolio exemplifies this trend.

Buyouts reviewed board documents detailing the $95.3 billion system’s private equity portfolio from its last quarterly meeting in June.

According to the documents, Michigan paid $1.2 billion in capital calls to its PE funds since the start of 2022 while receiving $954 million in distributions – a difference of $246 million.

At the end of March, the system allocated 23.5 percent of its total fund to private equity, above its 16 percent target but within its range of 13 percent to 27 percent, board documents show.

The current allocation is an improvement from the end of 2022, when the system allocated more than 24 percent of its total fund to private equity, according to the presentation.

According to board documents, private equity stands as Michigan’s largest asset class with domestic and international equities ranking second and third. Oregon Investment Council, another of the nation’s largest allocators to private equity, has also consistently seen private equity make up the largest share of its total fund.

The impacts of the combined overallocation and negative cashflow are reflected in Michigan’s private equity strategy for the next 12 months.

The system plans on only making commitments to existing managers raising new funds, according to board documents. This marks a shift from the strategy announced in June 2021, where the system said it would look to form relationships with new sponsors along with re-ups.

Michigan made $75 million in three commitments managed by Kholsa Ventures during the first quarter of 2023, board documents show.

During the same time period in 2021, the system made 12 commitments totaling more than $900 million, with its portfolio returning $251 million in cash, according to the documents.