New Jersey Close to Raising Cap on Alternatives

The New Jersey State Investment Council cleared the last hurdle before a final vote to allow the state’s $72 billion pension fund to allocate as much as 38 percent to alternative investments like private equity, hedge funds and real estate. That is 10 percentage points higher than the current 28 percent cap.

A final vote on the measure is scheduled for May. A spokesman for the state’s division of investment, Andy Pratt, told Buyouts that “chances are very good” that the new limit will be approved.

Pratt was quick to emphasize that the proposed 38 percent cap was not a target but an upper limit designed to allow the state’s chief investment officer, Tim Walsh, more flexibility in investing the state’s pension holdings. He said it is entirely possible that the share of assets allocated to alternative investments would never reach the 38 percent maximum.

Currently, 17 percent of the pension’s resources are invested in alternatives, including 6.4 percent in private equity. The state’s target return is 8.25 percent, among the highest in the nation.

Last December, New Jersey’s treasury department published a report saying the state had $53.9 billion in unfunded pension liabilities, adding pressure on pension officials to catch up by boosting returns.

Robert Grady, chairman of the New Jersey State Investment Council, told the Asbury Park Press that the expected increase in alternative investments would not only offer better returns to New Jersey’s pension fund, but it would lessen its overall risk by adding resources to investments that are not as easily influenced by changes in interest rates or the stock market.

The measure does have its opponents. The Communications Workers of America, one of the state’s largest unions, claims that the move to raise the cap is unnecessary given that the pension fund’s current 17 percent alternative allocation does not come close to the 28 percent cap already in place.