FIVE QUESTIONS WITH… JEFF STATES, State Investment Officer, Nebraska Investment Council

1. The Nebraska Investment Council manages $19 billion in assets, including roughly $400 million in private equity. What do you aim to achieve with your private equity portfolio?

We’re looking for a return that is 300 basis points above the public equity markets. Like lots of investors, we really focus on trying to get returns that are mid-teens or higher, as well as a multiple that is 2x or better. So, we expect to be compensated over and above the public equity markets for the liquidity risks that we’re taking.  And because private markets are not totally correlated to the day-to-day fluctuations in the markets, private equity also provides some diversification benefits.

2. The council started its private equity program in 2005, so it’s a fairly young program. Do you expect the program’s 5 percent allocation target to rise anytime soon?

Right now, we are in the process of completing our tri-annual asset-allocation study, and we’ll discuss the results in July. The purpose of the study is to look at our current allocation, and the benefits and impacts of changing it. These discussions will include alternatives.

Being relatively new to private equity, the council has been cautious about increasing our allocation until we get closer to our 5 percent target (currently at 3.7 percent). As we get closer, some investments are getting mature enough that we’re starting to see some distributions. When we begin to see some meaningful distributions and the enhanced returns that we expect, I think we’ll be ready to talk about whether we can be comfortable with a higher commitment level to private equity.

3. How closely does the Nebraska Investment Council pay attention to fees?

Fees are a strong area of focus. Fees were one of the reasons that the council shifted in 2007 away from using funds of funds as our primary vehicles—to cut out the middle layer of fees. There still may be some selective use of funds of funds to get diversification in areas we wouldn’t get otherwise.  

One of the hesitations that the council initially had about private equity was a strong dislike for paying fees on committed but uncalled capital. But to be honest, we’re probably not a big enough player to dictate terms, so we are working with our consultant and legal counsel to try and make sure that we keep pace with investor-friendly movements. Still, “two and 20” still sits hard with us, so we’re looking for attractive funds that would be willing to lower that fee structure. In some cases, we support paying lower management fees in exchange for a little more carry.  

4. What is your private equity commitment pacing?

Our pacing is between $140 million and $160 million per year, with a typical bite size of around $25 million, which means that we’re averaging around six commitments per year. Our goal is to manage somewhere between 25 and 30 GP relationships. We’re hoping to find GPs that we like and re-up with them as they bring new funds to market.  

5. What do you wish GPs better understood about the Nebraska Investment Council?

We’re not an outsourced client. GPs should remember that although we use a consultant, that consultant is working for us. It’s often more of a communications thing—that GPs remember not to leave us out of the flow. Initially, GPs didn’t understand that Hewitt-EnnisKnupp didn’t have discretion over our fund decisions. But the buck stops with the council, and it’s important for GPs to understand that we’re driving the relationship when we make investment decisions. The council is the investor and the consultant isn’t, so we ultimately make the final calls.

Edited for clarity by Gregory Roth.