Massachusetts PRIM to Increase Private Equity –

The $31 billion Massachusetts Pension Reserves Investment Management will increase its private equity allocation and is considering allocating money to treasury inflation-protected securities and timberland worth a total of $2.79 billion, according to the fund’s executive director Scott Henderson.

It is unclear at this time how the changes will be implemented and whether it will lead to searches, he said.

The fund will increase its private equity investments over the next five years from 8% to 10%, or by $620 million, focusing on venture capital and buyout oriented funds, said Henderson.

The fund has 6% currently allocated to the mandate, which would mean that an additional 2% of the original 8% target allocation is yet to be invested.

Private equity’s mandate was increased because of higher absolute returns and for purposes of diversification, Henderson said.

The board recently decided to put money into three private equity funds; $25 million was handed over to Charles Rivers Ventures, a $50 million buyout portfolio was given to Apax, and a $75 million buyout portfolio was awarded to CBC, Henderson said.

He said that Apax and CBC have demonstrated an ability to generate high returns on a risk-adjusted basis, and the board is comfortable with them investing large amounts of money over a substantial time period for the fund.

The increased allocation will be funded by decreases in domestic equity and domestic fixed income, he said.

The fund is also considering allocating 5%, or $1.55 billion, in treasury inflation-protected securities and allocating 2%, or $620 million, to timberland. The timber allocation would lead to searches, but the investment in TIPS could be distributed among existing fixed income managers, Henderson said. He said that the board must decide if the allocation should be actively or passively managed, and whether to award the TIPS mandate to a new manager, creating a new specialized mandate.

Henderson said that the increased investments in private equity and the new allocations to TIPS and timber are to generate better returns. The higher returns are needed because the fund is substantially underfunded due to weak returns on an absolute and relative basis in the early-to mid-1990s and the commonwealth was not funding or putting aside adequate amounts of money to meet long-term liabilities.

Timber and TIPS will provide the fund with healthy long-term returns, while private equity will generate large absolute returns, Henderson said.

Henderson Stepping Down

The fund will say good bye to Henderson, who said that he will be stepping down in late March. The search for Henderson’s replacement is currently underway.

Henderson will rejoin the Boston law firm of Bingham Dana where he worked from 1990 to 1994 prior to joining Massachusetts PRIM, first as general counsel, and then in 1997 as executive director.

At the firm, Henderson will focus on the needs of institutional investors, pension funds and endowments, plus work with consultants and money managers in the areas of regulatory issues and business transaction issues.

Henderson said that his future position at Bingham Dana will have a combination of legal and business responsibilities. He said that he stayed several years longer in the public service sector than he had planned, and now was a good time to leave, with the fund’s long-term asset allocation plan now firmly in place.

Dennis Sugino of Wilshire Associates, Santa Monica, Calif., is the fund’s consultant.

The fund’s current asset allocation, as of December is 25.4% large cap passive domestic equity, 6.4% large cap active domestic equity, 2.7% small cap passive domestic equity, 8.4% small cap active domestic equity, 3.5% EAFE passive international equity, 10.9% EAFE active international equity, 3.4% emerging markets equity, 7.2% core passive fixed income, 17% core active fixed income, 2.2% high yield bonds, 0.3% distressed debt, 1.1% convertible bonds, 5.4% core value REITS, and 6.1% alternatives.

The fund’s proposed target allocation is 22.75% large cap passive domestic equity, 5.75% large cap active domestic equity, 2.25% small cap passive domestic equity, 7.25% small cap active domestic equity, 4.25% EAFE passive international equity, 12.75% EAFE active international equity, 3% emerging markets equity, 5.25% core passive fixed income, 15.75% core active fixed income, up to 5% TIPS, 2% high yield bonds, 1% distressed debt, 6% core value REITS, and up to 2% timber.