Kansas LP wades back into PE water

After a six-year hiatus from private equity investing, Kansas Public Employees’ Retirement System is paving the way to get back in the action with a new adviser and a slightly higher allocation to the asset class.

In January, KPERS’ board of trustees voted to hike its total target allocation to private equity from 5% to 6%, giving the state pension fund $141 million to commit to general partnerships in 2008. Late last year, the Topeka, Kan.-based limited partner made its first two commitments to private equity funds in six years when the LP committed $35 million to OCM Opportunities Fund VII, a buyout fund managed by Oaktree Capital Management, and $50 million to Warburg Pincus Private Equity Fund X, which Warburg Pincus recently closed with $15 billion in commitments.

Meanwhile, the $14 billion public pension fund has selected a new alternative investment adviser to help guide its return to the land of buyout funds and venture capital vehicles. Since the contract is still being negotiated, KPERS’ Chief Investment Officer Vince Smith declined to identify the firm, but he said that the announcement will be made public in early March.

KPERS’ absence from the scene began in 2001, when the LP’s actual private equity investments were approaching its 5% target allocation. That year, “the equity markets fell out of bed,” Smith said, and plummeting stock prices reduced the overall value of KPERS’ portfolio, sending the amount it had invested in private equity north of 5% of its overall fund. Under state law at that time, KPERS’ portfolio could not exceed a 5% hard cap on investments that the state legislature defined as “alternative,” which included private equity. As a result, KPERS put the brakes on commitments.

The state’s tight limit on investments was a response to the pension fund’s disastrous foray into direct investing in the 1980s. By 1996, KPERS had filed more than a dozen lawsuits in an attempt to recover roughly $118 million in losses it sustained through direct investments in companies, including $65 million it invested in the Homes Savings Association of Kansas City, which federal regulators shut down in 1991. Fearful of future losses on risky investments, lawmakers reacted by imposing the 5% limit on the pension fund’s private equity investing in the mid-1990s.

In 2004, the legislature changed the way it defined its hard cap on the asset class. Now, instead of using the target allocation as the guideline, the state permits KPERS to invest 1% of its total portfolio in private equity each year. For example, as of Dec. 31, KPERS’ entire investment portfolio was valued at $14.1 billion, giving the LP up to $141 million to invest in private equity in 2008.

As of June 30, KPERS had 3% of its portfolio invested in private equity.

For a few years, KPERS also lacked a key human resource. Janet Kruzel, who ran alternative assets for the state pension fund, departed in 2003 and the position went unfilled until the fall of 2007 when the board of trustees appointed Cheri Woolsey, who had been overseeing fixed income investments for the pension plan.

The new investment adviser, who oversaw the state pension fund’s investments in Oaktree and Warburg, will help the LP seek out fund managers, devise a long-term investment strategy, and create sub-asset class allocations to determine how its private equity pie is divided across buyouts, venture capital and mezzanine debt funds. Last fall, the pension plan issued the RFP for a non-discretionary private equity adviser to replace Connecticut-based Portfolio Advisors.