New Jersey Sharply Boosts Alternatives; Commits $600 Million To PE

Fresh off its successful effort to raise the cap on alternative investments to 38 percent, the New Jersey State Investment Council, which manages $73 billion in pension funds, revealed plans to boost its 2012 target allocation for alternative investments to 25.5 percent, a significant jump from its current 17.3 percent allocation and the 14.6 percent national average reported by the National Association of State Retirement Administrators.

Separately, New Jersey announced $600 million in new private equity commitments to be spread equally among three funds. The first is $200 million to TPG Capital, whose TPG Specialty Lending Inc. fund plans to lend to mid-market, U.S.-based portfolio companies that are managed by private equity firms. The fund aims to raise between $750 million and $1 billion.

The second commitment, also $200 million, is being made to Vista Equity Partners Fund IV. The San Francisco-based Vista Equity Partners invests mainly in software and technology companies. Vista’s Fund IV has a target of $2.5 billion. The final $200 million commitment is to NJAI Fund II, a fund-of-funds from New Jersey Asia Investors that invests specifically in Asian private equity funds. New Jersey said in a memo that its private equity portfolio was underweight in Asia.

Pension officials say they are backing more alternative investments not only because they offer better returns, but also because they can lessen a portfolio’s overall risk level since alternatives are less influenced by changes in interest rates and the stock market. Tim Walsh, the state’s investment director, told the Bergen Record, “Hopefully we’ve learned our lesson,” in describing the damage wrought by the financial crisis. The aim of alternative investments, he said, is “to get diversified,” adding that such investments have outperformed stocks over the last decade.

New Jersey’s state pensions are only 57 percent funded, one of the lowest funding ratios in the nation among state pensions. As of December, the state had $53.9 billion in unfunded liabilities, according to a report by state’s Treasury Department.

By far, the alternative category to see the biggest target increase is hedge funds, whose allocation level is set to nearly double under the new 2012 targets, to 10 percent from 5.3 percent. That rise translates into about $3.5 billion in additional money for the hedge fund industry.

Moreover, under the state’s “Preliminary Long Term Target,” a provisional target that is pending the completion of an asset-liability study, alternative assets are set to grow even further, to 33.2 percent, closer to the state’s newly raised 38 percent cap (the state’s previous alternatives cap was 28 percent). Under that long-term target, the allocation to hedge funds would grow to 14 percent.

New Jersey defines alternative investments as hedge funds, private equity, real estate and commodities/real assets. Private equity, representing 6.7 percent of the current portfolio, will rise to 7 percent under the 2012 plan. Commodities, now 2 percent of the portfolio, are set to double to 4 percent.

Much of the money being targeted to alternative investments will come from a shift in emphasis away from U.S. fixed income investments. The previous target of 41.8 percent for U.S. fixed income will become a 30.5 target under the 2012 allocation plan.