Connecticut plans $50 mln commitment to support local, diverse and emerging PE firms

  • Mulling commitment to fund that emphasizes diverse, emerging and state-based funds
  • Previous investments to fund have generated a 7 pct IRR, underperforming target
  • State also moves ahead with $100 mln venture capital commitment

Connecticut State Treasurer Denise Nappier is considering a $50 million allocation to Connecticut Private Equity Horizons Fund, which focuses on small and mid-market funds that are managed by women-owned, minority-owned, emerging or Connecticut-based investment firms.

Nappier presented the investment opportunity at the Oct. 24 meeting of the $30 billion Connecticut Retirement Plans and Trust Funds’ investment advisory committee, along with a potential $100 million commitment to a real estate fund.

Nappier also said she’d decided to move ahead with two investments she had presented at an earlier October meeting: $100 million to Fairview Capital Partners’ Constitution Fund V, which invests in underlying venture capital and growth stage funds. One-quarter of that commitment will be earmarked for co-investments in late- and growth-stage companies located in Connecticut, Nappier said.

Connecticut went ahead with the commitment despite having some concerns about senior-level departures from Fairview since 2016.  The firm has lost three partners in two years, and the departures raised concerns about losses in investments, operations expertise, institutional knowledge and manager relationships, according to pension fund documents.

Connecticut decided that the risk of underperformance was mitigated by Fairview’s long-term track record of executing the fund-of-funds strategy, according to the documents.

Connecticut formed Connecticut Horizon Fund in 2007, aiming to provide opportunities for emerging, minority-owned, women‐owned, and Connecticut‐based investment firms, and the state added a PE allocation to Horizon Fund that same year.

Nappier has allocated up to $190 million for Connecticut Horizon Fund PE investments since inception, through commitments made to four private equity funds-of-funds, managed by Muller & Monroe and JP Morgan, according to meeting documents.

Since inception, Connecticut Horizon Fund has generated a net IRR of 7 percent, underperforming its benchmark, which is based on the S&P 500 plus 500 basis points.

Performance and pacing

Connecticut also reviewed its private equity portfolio’s performance and pacing during October.

The pension fund reported making eight commitments for the year, worth a total of $548 million, as of June. For the year, it has targeted five to 10 commitments totaling $350 million to $650 million in aggregate value. None of the new commitments were for VC, before the Constitution Fund commitment was approved.

Since the PE portfolio began in 1987, the state has made $7.8 billion of contributions and received $9.3 billion of distributions. The market value is $2.6 billion, which represents 7.5 percent of Connecticut’s total portfolio, according to an overview provided by StepStone.

Since inception, the PE portfolio has produced a net IRR of 9.2 percent and a net multiple of 1.5x invested capital.

CRPTF went though a moratorium on private equity investment between 1999 and 2002, and its investments made after 2002 have generated higher aggregate returns, generating a net IRR of 12 percent.

Over the past 10 years, CRPTF has found the most success in middle-market buyout funds, which produced a 15.6 percent IRR over that period.

Since inception, however, distressed funds and early-stage venture have been the best-performing asset classes for the retirement fund. Early-stage venture, though, has been a slight negative over the past 10 years, with a negative 0.3 percent IRR.

Its since-inception performance has been driven primarily by a 1987-vintage fund, Constitution Liquidating Fund, which generated a 20.1 percent net IRR. That same fund also contributed to outlier since-inception success of funds-of-funds for the state, according to meeting materials.

Connecticut’s current PE portfolio is concentrated primarily on buyout strategies, which represent 49.6 percent of its total exposure. The portfolio focuses almost exclusively on North America, which accounts for 90.4 percent of its total exposure.

Overall, Connecticut counts 44 managers in its PE portfolio. Its largest relationship is with Fairview Capital Partners. The retirement system has invested in six Fairview funds, and has $743 million in exposure, representing 18 percent of the total PE portfolio.

Connecticut has an 11 percent long-term target allocation to private equity.