Denominator effect could curtail NJ pension’s PE commitments this year

  • AUM: $78 bln
  • PE/Private debt target: 10.25 pct
  • PE/Private debt actual allocation: 11.86 pct
  • Contact: William Skaggs at  or +1 609-777-1074

New Jersey’s state pension system is planning a jump in its private equity allocation beginning in 2020, although its 2019 pacing remains in doubt as it balances its strategic plan with a 12 percent regulatory cap on PE.

The $78 billion pension system is near its maximum allocation to PE and private debt. Low or negative returns in its public-market holdings could cause it to exceed the 12 percent regulatory limit on those combined asset classes.

New Jersey’s actual allocation to PE and private debt is 11.86 percent, over its 10.25 percent target, and it actually exceeded the legal limit on two dates in December as public markets were hammered.

The state’s PE plan calls for $500 million to $700 million in commitments for 2019, before essentially doubling, to $1.2 billion to $1.4 billion annually, from 2020 to 2025.

But those plans are based on a base-case assumption of a 7.25 percent investment return, with a net pension growth of 0.6 percent.

New Jersey’s investment consultant TorreyCove also modeled a pacing plan for a so-called sensitized case, with an investment return of 4.5 percent and net pension growth of -2.1 percent.

If the overall pension assets shrink, New Jersey may not be able to make any PE commitments as the denominator effect pushes its PE portfolio to 12 percent of its total assets.

Throughout the year, New Jersey will keep an eye on factors that play into both the base case and sensitized scenarios, including pacing of capital calls and distributions, investment returns, pension contributions and benefits payments, spokesman William Skaggs told Buyouts.

“The division monitors the pacing model on an ongoing basis and adjusts its commitments, if appropriate, based on actual outcomes over time,” Skaggs said.

The sensitized case could discourage New Jersey from making any commitments that would draw capital this year. In that scenario, TorreyCove expects New Jersey to make no commitments in 2019, followed by commitments of $925 million to $1.3 billion annually in 2020 through 2025.

Even in the sensitized case, however, New Jersey could still make room for commitments in second-half 2019, if the funds would close or first draw capital in 2020.

But sitting out for a year and then jumping up to $1 billion or more in PE commitments risks vintage-year concentration, according to TorreyCove.

New Jersey’s PE returns have already suffered such concentration as a result of the 2008 recession.

The system’s commitments peaked in 2008, with almost $3.5 billion allocated to the asset class, then shut off almost entirely in 2009 and 2010, before resuming at a rate of close to $1 billion a year for the next seven years.

To make room for new investments, New Jersey may consider secondary sales, according to Corey Amon, acting director of the Division of Investment.

To help the pension funds balance their long-term goals with the need to stay under the regulatory cap, Amon asked the board to change its policies to allow more flexibility.

Under Amon’s proposal, the investment division will notify the State Investment Council when market value exceeds the 12 percent cap, and the council can then decide to provide a grace period for making adjustments.

The council would also consider adjusting the regulatory limit on PE investments to provide more flexibility relative to the target allocation, as part of its asset-allocation discussion.

The pension funds’ current allocation to buyouts and venture capital is 10.07 percent, with a target of 8.25 percent, and its current allocation to debt-related private equity is 1.35 percent, with a 2 percent target.

The New Jersey Division of Investment, supervised by the State Investment Council, is responsible for the state’s pension funds.

Action Item: Check out the New Jersey’s latest investment performance report here