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Iowa considers putting the brakes on private equity as allocation level rockets

The denominator effect rears its ugly head as fund’s PE allocation is highly overweight.

Iowa Public Employees’ Retirement System may reduce its allocation to private equity and the size of individual commitments as its actual allocation far exceeds its 13 percent target.

The denominator effect has boosted private equity allocations, which has some pension boards and other owners of large pools of capital considering tough decisions to bring their portfolio closer to target ranges. In Iowa’s case, the actual allocation to private equity is nearly 21 percent, according to a presentation made at the $45.2 billion fund’s investment board meeting held on June 16.

“One thing we can control as staff is the level of commitments. And we can anticipate that commitment levels and bite sizes will be a lot lower going forward,” said Iowa senior investment officer Pat Reinhardt.

Iowa chief investment officer Sriram Lakshminarayanan said the board would discuss asset allocation at its September meeting. “Private markets are inelastic in nature. We’re trying to get to our target as quickly as we can,” said Lakshminarayanan.

Iowa’s 2021 investment plan calls for commitments up to $1 billion to private equity. It has committed $704 million to date, according to the presentation.

The private equity portfolio received $2.1 billion in distributions for the year ending in March, the presentation said. This was the largest distribution over a one-year period in the fund’s history.

The private equity portfolio earned a three-year return of 31.6 percent, exceeding its benchmark of 22.5 percent, according to the presentation.

The private equity portfolio has more than $8.5 billion in assets, according to the presentation.

Just under $7 billion is committed to the PPEF XXV fund-of-funds managed by Pathway Capital Management, which Iowa started using as its primary private equity investment in 2014, according to the presentation.

Pathway also manages a co-investment program for Iowa, having made 104 commitments for a total of $779 million, the presentation said.

Iowa also has a “legacy” portfolio of commitments it made between 1987 and 2014. As of the end of March, this portfolio consisted of 146 active partnerships with a market value of $1.6 billion.