Future of New Jersey pension system’s PE program uncertain

  • Newly-elected governor wants to divest private equity
  • Ran on populist agenda
  • Pension has been investing in PE since 2005

New Jersey’s massive state pension fund may shift away from private equity once newly elected Gov. Phil Murphy takes the reins in Trenton.

Murphy, a Democrat and former Goldman Sachs executive, was elected in November. He campaigned on a populist platform that included divesting the pension from PE and hedge funds.

“These investments have cost us hundreds of millions in fees while delivering only middling results. Phil will stop this practice, and ensure that pension fund dollars are put to work for the people who earned them, not for Wall Street,” his campaign website says.

During a State Investment Council meeting in November, Chairman Thomas Byrnesaid he might be on his way out, as Murphy might not reappoint him to the council.

“Our approach is pretty much the norm in the world of public pensions, except that we have been recognized as cutting edge when it comes to creativity and structuring deals and negotiating fees,” Byrne said at the meeting.

“The governor-elect made his fortune as a top-tiered investment executive and has made our investments the central issue in the recent campaign, so I certainly hope those skills will be put to use to do even more to buttress the pension funds.”

Murphy’s campaign rhetoric calls for overhauling the way the system invests its fund, which totaled around $76 billion of assets as of June. The fund returned more than 13 percent in the fiscal year that ended in June, its best performance since 2014.

No one from Murphy’s transition team returned a request for comment. A source with knowledge of the process was less definitive on the future of the private equity program and said the incoming governor will likely do a closer review of the fund’s strategy when he officially gets into office.

Innovation

New Jersey has been building its PE program since 2005. The portfolio had a total value of about $19 billion as of October and an aggregate total value multiple of 1.47x, pension documents show.

The system has a target allocation to buyouts and venture capital of 8.5 percent, and an actual allocation as of October of 8.8 percent, pension documents said.

New Jersey has been an innovative LP, creating one of the first strategic relationships with a large PE firm, Blackstone Group, in 2011. New Jersey also was an early investor in Vista Equity Partners, which has grown quickly into one of the larger firms in the industry.

While “divesting from private equity” might work well on the campaign trail, in practice there is no easy way to get rid of a PE portfolio — especially one as big as New Jersey’s and especially when that portfolio is helping drive returns (despite high fees).

Portions of the portfolio can be sold on the secondary market, but that likely comes with a discount. The portfolio can be wound down naturally but that takes years, perhaps even longer than Murphy will be in office.

Meanwhile, the system continues to commit to new funds. At the meeting, the council moved forward a commitment to Sycamore Partners’ third fund, which is targeting $4 billion.

Murphy has advocated a millionaires’ tax, the creation of a public bank to invest in local small businesses, raising the minimum wage to $15 an hour, creating a consumer protection bureau and investments in transportation infrastructure.

Action Item: Read more about NJ State Investment Council here: http://www.state.nj.us/treasury/doinvest/sicreg.shtml