Georgia, one of the last holdouts among states prohibiting public pensions from investing in alternatives, has relented. Nathan Deal, the state’s governor, signed a law allowing all but one of the state’s public pensions to invest as much as 5 percent of their assets in alternatives, including private equity.
That one holdout, however, happens to be the state’s largest public pension, the $48 billion Georgia Teachers’ Retirement System. That pension will maintain its alternatives ban until—and possibly after—the pension’s board has an opportunity to consider such a change.
The biggest Georgia pension affected by the new law is the $14 billion Georgia Employees’ Retirement System.
“Our first step is talking about it and developing a plan,” said Tom Horkan, the pension’s assistant chief investment officer, about reaction to the new law. “We’re going to take a deliberate and methodical approach.”
Under the bill, affected pensions will be allowed to invest up to 1 percent a year on alternative investments until the caps are reached. The law defines alternative investments as private equity, hedge funds “and other private placements,” and allows the pensions to invest in firms that manage at least $100 million worth of assets.
Many state pensions, which have been hit hard by the recent financial crisis, have been increasing their allocations to alternatives, as they take on additional risks in the hope that greater possible returns will help them “catch-up” to their pre-recession funding levels. These growing allocations to alternatives also stem from the increasingly precarious finances of some states, which in some cases have reduced or delayed their annual funding contributions.