Freshman LPs Prep for Private Equity –

With today’s state pension funds facing the double whammy of increased benefits rolls and falling equity returns, many are looking to the private equity markets for long-term security. At least five institutional investors this year have announced plans to make first-time commitments to private equity, and they have approximately $1 billion to spend.

Others, like the $448 million Knoxville City Employees’ Pension Fund and $455 million El Paso Fire & Police Retirement System, have begun portfolio reviews and are keeping a close eye on the following freshman LPs:

Arkansas Public Employees’ Retirement System

APERS has a standing 10% allocation for alternative investments, but the $3.7 billion pension fund has never invested in private equity. Its alternative investment portfolio includes $63 million worth of real estate investments and another $170 million worth of timberland. APERS started to mull the possibility of investing in private equity in August, and its board is expected to finalize plans by year-end. For fiscal 2001, APERS’ portfolio lost 3.8% of its value. Its value declined another 2.2% in the first seven months of fiscal 2002.

Illinois General Revenue Fund

The state plans to invest up to $60 million, or 1% of its General Revenue Fund, in venture capital funds over the next three years. It will invest in private equity funds that are either based in the state or have actively sought and funded deals in the state in the past. Illinois is actively seeking an investment advisor to develop a strategy. While the treasurer’s investment staff will oversee and manage the fund’s private equity investments, an investment review committee will sign off on any new investments. That committee will be made up of representatives from the treasurer’s office, the state university system, state economic development groups and local VCs.

Indiana State Teachers’ Retirement Fund

After completing its first asset allocation study in three years, the fund made its initial commitment to private equity in July. Under the direction of Portfolio Advisors of Darien, Conn., the $6 billion system is set to allocate up to 5%, or $150 million, of its $3 billion of actively-managed assets to private equity. Over a five- to 10-year investment cycle, the pension fund is aiming for 15% returns. It plans to invest in leveraged buyouts, special situations and venture capital funds, but it has only targeted buyout shops so far: The Blackstone Group of New York, pan-European shop Cinven and New York-based Warburg Pincus.

Missouri Public School Retirement System

In January, the Missouri Public School Retirement System said it would invest up to 3% of its portfolio, or up to $200 million, in private equity funds. The $20 billion pension plan will not invest directly in any private equity funds. Instead, it is planning to invest alongside other institutional investors in state-managed and state-focused fund-of-funds with $50 million to $200 million under management.

San Bernardino County Employees’ Retirement Association

The California county’s $3.2 billion pension fund will allocate up to 7% of its assets, or $224 million, to private equity investments after selecting a consultant at the September meeting of its investment committee. For the fiscal year ending June 30, the fund posted a loss of 4.3%, leaving it almost 12% short of the returns needed to meet its fund obligations. It expects its private equity portfolio to return at least 10 percent.