LP corner, week of July 12, 2010

Illinois Teachers’ to launch co-invest program

In a sign of growing interest among investors in direct investments, the $32 billion Teachers’ Retirement System of the State of Illinois expects to launch a $50 million to $75 million co-investment program in the next 12 months, said Director of Investments Greg Turk at a June conference in Chicago hosted by Buyouts, an affiliate publication to PE Week.

The limited partner is now searching for an adviser to help run the program.

In April, Stan Rupnik, the pension fund’s acting executive director, said that “co-investment may be an area of interest, should these opportunities be found to add to the risk/return profile of the overall fund.” The pension also sees co-investing as a way to help manage liquidity and lower fees, since general partners don’t generally charge management fees or carried interest on co-investments.

Illinois Teachers’ is one of several pension funds placing greater emphasis on co-investments. The California Public Employees’ Retirement System considers it a priority this year to add to its in-house co-investment capabilities. And the California State Teachers’ Retirement System, which began co-investing in 1996, allocates 7% of its private equity portfolio to co-investing. CalSTRS is now seeing more opportunities for co-investing, which is handled internally, but its “interest will hinge on the relative risk-reward potential,” said a spokesperson.

The Florida State Board of Administration, the New York State Teachers’ Retirement System, the Oregon Public Employees’ Retirement Fund, the State of Michigan Retirement Systems and the Washington State Investment Board all have co-investment programs that rely on outside advisers.

In Canada, several large LPs are changing the emphasis of their private equity programs from making fund commitments to doing direct transactions using their in-house staffs. Plan sponsors taking this tack include the Alberta Investment Management Co., OMERS Private Equity, the Ontario Teachers Pension Plan and the Public Sector Pension Investment Board. —Nancy Gordon

Colorado pension pledges to four

The Fire and Police Pension Association of Colorado recently pledged nearly $60 million to several private equity strategies, including international, distressed and small to mid-market buyout funds, as the limited partner approaches its target for the asset class.

The $2.9 billion plan sponsor’s actual allocation to private equity stands at 13%, according to CIO J. Scott Simon, while its target allocation is 14 percent.

The LP clearly has an interest in international funds, as exhibited by two recent pledges. Netherlands-based Gilde Buy Out Partners got a slug of $13.4 million for its fourth fund, earmarked for mid-market deals in Western Europe. Gilde Buy-Out Fund IV closed on June 30 with more than $1 billion.

Elsewhere, Hong Kong-based SAIF Partners received a pledge of $10 million for its fourth fund, earmarked for growth equity and buyout deals in China and India. The vehicle is reportedly nearing a close with $1.25 billion.

In the distressed arena, the state pension fund committed $15 million to H.I.G. Bayside Loan Opportunity Fund II, earmarked for distressed loan investments. Bayside Capital, an affiliate of H.I.G. Capital, buys bank and public debt, including senior bank debt, junior secured debt, mezzanine debt and bonds. The firm is seeking $1 billion for the vehicle, according to a May filing with the Securities and Exchange Commission.

Also, the LP pledged $20 million to J.H. Whitney & Co.’s J.H. Whitney VII, which will be used for investments in U.S.-based small and mid-market companies with strong growth prospects. The firm is seeking $800 million, according to a regulatory filing. —Nancy Gordon

Castle Private Equity posts loss on VC investments

Swiss-listed Castle Private Equity posted a loss of $10 million on its venture investments in 2009, on a portfolio of $109 million assets (19% of total assets under management).

Castle Private Equity is Swiss alternative investment manager LGT Capital’s listed private equity vehicle.

Within the vehicle’s venture portfolio, early stage technology found few interested parties and generally lost value during new rounds of financing. As a result, $8 million out of the $10 million loss was recorded by early stage venture investments. Late stage venture was more resilient, with losses of $2 million.

Early stage venture accounts for 10% of Castle Private Equity’s total portfolio. Late stage venture accounts for 8% and growth capital for 1 percent.

Reducing the risk of the portfolio was the top priority for 2009. No new commitments were entered into during the year, maintaining the decision taken in the Autumn of 2008 to cease such activities for the time being. —Angela Sormani