New Jersey putting PE on ice until Gov. Murphy weighs in

  • Gov. Phil Murphy called for divesting from PE, hedge funds
  • Murphy has yet to move forward with that plan since taking office
  • PE top performing asset class for underfunded pension over previous three years

Newly-elected New Jersey Gov. Phil Murphy’s antipathy for private equity has thrown the future of the state pension system’s $7 billion PE portfolio in doubt.  

New Jersey State Investment Council is putting commitments to new private equity funds on ice as long as there’s a chance the Murphy administration would divest or cancel certain alternative investments, said Council Chairman Tom Byrne in his opening remarks at at March 28 meeting.

Murphy, who advocated divestment from private equity and hedge funds during the 2017 gubernatorial campaign, has yet to provide guidance on how the Council should proceed. It’s unclear whether Murphy, a progressive Democrat and Goldman Sachs alum, will move forward with his plan to divest the state pension from its private equity holdings.

“There’s no way I want us to be in his face,” Byrne told Buyouts after the meeting. “I want us to do stuff he’s happy with.”

Byrne said he hasn’t had a chance to sit down with Murphy since his inauguration in January due to scheduling conflicts. A spokesperson for Murphy could not be reached for comment at press time.

Private real estate funds were spared from the Murphy campaign’s scrutiny. The State Investment Council moved forward forward with a commitment of up to $100 million to TPG’s new real estate fund, targeting $3 billion, at its March 28 meeting.

New Jersey’s private equity program was delivering a three-year trailing return of 13.06 percent as of Feb. 28, surpassing its benchmark by roughly 2.5 percentage points, according to its most recent investment report. The PE portfolio was the top-performing asset class for New Jersey during that period.

New Jersey’s private equity portfolio includes substantial holdings in funds managed by marquee firms like Blackstone Group, TPG and Vista Equity Partners. In his March 28 comments, Byrne invoked the latter firm’s founder Robert Smith in saying private equity offers the best way to access companies in high-growth sectors like technology, particularly as fewer and fewer businesses go public.

“I think it’s one of the best parts of our program,” Byrne told Buyouts, adding that a more-permanent moratorium on private equity could affect the retirement system’s long-term investment returns and funded status. “I worry about the five- and 10-year time horizons.”

New Jersey’s pension remains severely underfunded. The total pension fund’s assets can only cover 50.5 percent of its current and future liabilities, according to an Aon Hewitt Investment Consulting study presented at the March 28 meeting. The state’s Judicial Retirement System, valued at just $196 million, is only 31.6 percent funded.

Aon Hewitt recommended the Council continue to allocate to return-seeking assets, including both public equity and private equity, as a strategy to improve the pension’s funded status. New Jersey’s target allocation for PE currently stands at 10.25 percent.

A higher allocation to private equity could bolster the retirement system’s investment returns, reducing the burden on state and local taxpayers to make up the difference in contributions to the pension system.

Private equity investments are also costly and highly illiquid, however, and are often viewed warily by political leaders with more populist leanings. North Carolina Treasurer Dale Folwell, a conservative Republican, halted new commitments to private equity last year.

With a new governor in power, Byrne signaled his time on the State Investment Council is likely coming to a close. Byrne, a Democrat who contemplated mounting his own gubernatorial bid in 2016, was appointed to the State Investment Council by former Republican Gov. Chris Christie in 2010.  

“My time here is nearly over. The new governor, who has expressed dissatisfaction with the way we’ve handled alternative investments, should have his own chairman,” said Byrne.

After thanking investment staff, which oversees the state’s $76.7 billion investment program, he added  “I’ve tried to do my part and will continue to do so until my time is officially over.”

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New Jersey State Investment Council Chairman Tom Byrne reads his opening comments at the March 28, 2018 SIC meeting in Trenton, New Jersey. Photo by Sam Sutton.