MassPRIM Eyes Buyout, Green Funds

As some public pension funds butt up against their allocation ceilings for alternative assets, the Massachusetts Pension Reserves Investment Management Board still has money to spend. The limited partner has so far this year committed less than a third of the $1.5 billion it plans to devote to alternatives in 2008.

The pension fund’s official target allocation to alternatives is 9 percent. Within that, 80 percent is devoted to LBO funds and 20 percent to venture capital. Until this year, the target allocation to alternatives stood at 10 percent, but the MassPRIM board dropped the target to 9 percent in January, anticipating that it would take five years to reach the former goal.

“We did it to reflect a closer allocation to where we actually are,” said Wayne D. Smith, senior investment officer for MassPRIM’s alternative investments. As of February 29, the limited partner’s allocation to private equity had a market value of $4 billion, equal to 7.8 percent of pension fund assets.

So far in 2008, buyout funds have attracted the majority of the Boston-based LP’s commitments: €100 million ($152 million) for Advent International’s sixth global fund, which recently closed with $10.4 billion in commitments; $200 million for TPG Partners VI LP; and $50 million to Towerbrook Investors III LP. In addition, MassPRIM committed $30 million to Summit Partners’s newest subordinated debt fund, which closed last month.

Looking ahead, MassPRIM is carving out a new allocation to fund managers specializing in “green” investments. This follows a decision in January to annually allocate an additional $300 million solely to alternative investments as part of a “natural resources” mandate. This spring Smith and his team, consisting of an investment officer and an investment analyst, plan to identify players in the energy sector and meet with fund managers.

For 2008, the LP has set a goal of committing to 15 to 20 funds from among the 300 or so managers that annually seek investments from MassPRIM. About one-third of its buyout fund allocation is earmarked for large and mega-market vehicles, another third to mid-market funds, and the remainder to a combination of industry-specific and small funds. MassPRIM typically commits an average of $100 million to buyout funds, Smith said. MassPRIM last year hired Hamilton Lane to help it vet its alternative asset commitments.

Alternative investments have generated high returns for MassPRIM over the past decade. The asset class’s return from the end of Feb. 2007 to the end of Feb. 2008 was 39.6 percent. The three-year February to February return was 36.1 percent; five year was 28.0 percent, and 10-year was 16.5 percent. Since 1986, when MassPRIM began committing to alternative investments, the asset class has yielded a 15.7 percent return, according to Smith.

Still, with the economy slowing and buyout firms struggling to do new deals, Smith said he doubted that LBO shops would reproduce in 2008 the returns they achieved in the previous seven years. Although MassPRIM’s returns on its alternative investments have not yet suffered from the economic slowdown, that will likely change by June 30, when the LP finalizes its second quarter numbers, he said.

“Since 2000, performance has been extraordinary for private equity,” he said. “We’re heading into a more difficult time.”