The Colorado Public Employees’ Retirement Association (CoPERA) may be lowering its private equity allocation, but the pension fund is still considering new commitments.
“We are making new commitments, and we are going to keep investing. We’re just holding all our relationships to a very high standard,” said Kevin Kester, director of alternative investments for CoPERA. “We don’t buy the idea that you pick your partners and have to stay with the same ones for 20 years. If a private equity firm is not performing, you have to cut the cord. We are loyal to groups that have performed for us, but we can also get rid of the non-performers and invest in new groups.”
The pension fund, which is the nation’s 23rd largest, has $27 billion of assets under management. About 10%, or $2.7 billion, of the pension has been dedicated to private equity. While CoPERA’s private equity investment target can be as high as 12% or as low as 3%, Kester said the pension plan is currently overexposed to the asset class and is working on bringing the allocation down to about eight percent.
“In the 90s, when we were building a portfolio and we were under allocation, we didn’t have the sophisticated tools to really analyze and understand how much we needed to commit to the asset class,” Kester explained. “We overshot.”
CoPERA is trying to lower its allocation in the least disruptive way possible. Instead of stopping the dollars from flowing all at once, the firm is going to be putting out less money out over the next couple years. “We are going to try to come in with as soft a landing as possible. If you take a drastic measure like stop investing, then you will wind up undershooting. We really just want to put our money at a steady pace of about 10%-nothing is exact,” said Kester.
That’s a big difference from the way CoPERA had been investing. In the 1990s, Kester said, CoPERA would put just $300 million into private equity one year, but invest a full $1 billion the following year. “That just is not ideal,” he said. This year, the pension intends to put about $300 million to work and continue to stay close to the number for years to come.
Naturally, when making a new investment, or reviewing a firm it has already invested with, CoPERA looks at the firm’s track record, and makes sure the investors responsible for the record are still with the firm and motivated. “We are looking for people that are really hungry. Sometimes investors make so much money from a good fund, they really don’t have the drive to work as hard with the next. We check those kinds of things out,” Kester said.
Going forward, CoPERA will maintain its 70% to 20% to 10% split between investing in buyouts, venture and special situations, respectively. However, CoPERA is looking to de-emphasize its exposure to larger buyout firms. Right now, investments in larger buyout shops make up half of its buyout allotment. Kester said the pension fund is looking to get that number down to 25% in order to protect itself from overexposure to any one deal. “There is a place for larger buyout funds, but there is such a thing as too much. There is a lot of teaming up between the big firms, and you wind up with double or triple exposure to any given deal. The other problem is that many times the big firms are competing for the same deal, so being an investor with all of them just doesn’t make a lot of sense,” Kester said.
The pension fund will stay with between four to six large, U.S.-based buyout shops and three to four large European funds. In fact, CoPERA just made investments into Permira and CSFB’s secondary fund. Additionally, it made an investment into HSBC Asia, which isn’t a core investment area, but an area that Kester describes as ripe with opportunities.
While CoPERA traditionally hasn’t had too much trouble getting into top-tier funds, Kester acknowledges that the disclosure debate could make his job more difficult.
“It’s clearly an issue. We are attentive to it and trying to develop a policy on it. We are keeping our eyes and ears open and are hoping for a good resolution. Even putting IRRs on a Web site can make us less attractive to certain groups. There has to be some precedent set that keeps company-level information private,” Kester said. “I really don’t see how the pension holders would be helped by that information anyway. If it’s made public and competitors get that information, it can hurt the company, which could hurt the private equity firm’s investment and then hurt the value of our investment, which is made on behalf of the pension holders. That’s what this is really about.”
Colorado Public Employees’ Retirement Association
Founded: 1931. Provides retirement benefits to more than 380 government agencies and public entities in the state of Colorado
Capital under management: $27B
PE Allocation: About 10%
Recent Investments: $34M in Permira, $30M in HSBC II; and $50M in CSFB II