The commitment pace of the Indiana Public Retirement System illustrates, more dramatically than at many pensions, just how quickly some programs accelerate to a peak before a rapid fall-off phase.
According to data provided by the pension fund, the Indiana retirement system started its private equity program in 2002, although it has exposure to funds earlier than the 2002 vintage through secondary purchases. The first few years saw the retirement system, which has a fairly diversified program by strategy and geography, commit to just a handful of funds each year, including commitments of $47.7 million to 13 vintage-2004 funds.
Things started heating up around 2005, with Indiana Public Retirement System committing $182.0 million to 17 vintage-2005 funds. It then committed $670.6 million to 35 vintage-2006 funds, $942.2 million to 46 vintage-2007 funds and $925.2 million to 38 vintage-2008 funds. A rapid fall-off in commitment pace followed. The retirement system committed just $240.0 million to six vintage-2011 funds, $444.0 million to nine vintage-2012 funds and $575.0 million to eight vintage-2013 funds as of Dec. 31. (Noteworthy is that its average commitment size more than tripled from $20.5 million to vintage-2007 funds to $71.9 million to vintage-2013 funds.)
In an emailed response to questions from Buyouts, Jeffrey Hutson, a spokesman for the retirement system, said, “The rapid increase in commitment pacing was primarily driven by increases in the private equity allocation and the ramping up of the program.” He attributed the slowing to “a combination of the recession reducing the overall plan assets, the corresponding denominator effect on the private equity allocation, and some turnover in the investment staff.” He also pointed out that in 2011 the state’s public employees’ and teachers’ retirement systems merged to form Indiana Public Retirement System, which required the pension to “revisit” its commitment pace.
Indiana Public Retirement System, which managed $21.5 billion in defined-benefit assets as of June 30, 2013, had 13.3 percent of those assets in private equity as of mid-2012; that figure had fallen slightly to 13.0 percent as of about a year ago. That put the program near the top of its allowable target range for private equity of 7 percent to 13 percent as of June 30, 2013. The retirement system is in the process of transitioning to TorreyCove Capital Partners as its private equity adviser.
So how has the portfolio performed? Domestic mid-market buyout funds as of June 30, 2013, had generated a net IRR of 20.5 percent since inception, according to the latest annual financial report posted by Indiana Public Retirement System on its website; domestic large buyout funds had returned 15.5 percent since inception; late-stage venture capital had returned 18.5 percent; and energy funds had generated 17.3 percent. For comparison, domestic buyout and turnaround funds across the entire returns database collected by Buyouts, spanning vintage years 1981 to 2008, generated a median IRR of 10.6 percent and a top-quartile IRR of 18.4 percent.
Buyouts performed its own analysis of just the pension fund’s 198 2009-vintage and older funds, to avoid the J-curve effect. We found those funds to have generated bottom-quartile, median and top-quartile investment multiples of 1.3x, 1.5x and 1.7x; and bottom-quartile, median and top-quartile IRRs of 6.8 percent, 11.2 percent and 18.3 percent. Such figures put the pension fund close to the head of the class for a group of 14 institutional investors whose private equity returns Buyouts analyzed last fall.
Hutson pointed out that the retirement system “did not start to make commitments in line with the increased pacing that it employs today until 2006. As such, the actual age of the portfolio is likely closer to eight years than to 12 years.” He added: “Given the portfolio’s age and the significant contributions made from 2006 to 2008, which have shown to be somewhat challenging vintage years, we are pleased with the fact that the private equity portfolio was significantly cash flow positive in calendar year 2013 and that returns have been positive contributors to the overall plan’s returns.”
Maintaining a steady commitment pace may be a worthy objective. But the Indiana retirement fund shows that you can still go against conventional commitment-pace advice and perform exceptionally well.