New Jersey’s State Investment Council agreed to increase the state Division of Investment‘s private equity and private credit target allocations Wednesday.
Staff said the asset classes had a positive outlook in the aftermath of the coronavirus crisis, even though there will be little clarity on the state of private market valuations until this fall.
“Private equity performance tends to increase following downturns,” Division Director Corey Amon told council at its meeting, conducted via teleconference. “This is the point in time that private capital can buy portfolio companies at more attractive prices and with less competition.”
Amon gave a presentation on asset allocation, pointing out that the state’s $75 billion fund was in good shape from a liquidity standpoint, meaning it could afford to shift to more “return-seeking” investments that bring greater risk but also greater possible returns.
The Division’s private equity target was raised to 13 percent from 12 percent. Its private credit target went up to 8 percent from 6 percent.
The Division will take its time building its portfolio towards the allocation, though—meaning that for the time-being, its benchmark weight will remain at 12 percent. The private credit benchmark weight will only go up to 7 percent.
“You want to take an approach that would support vintage year diversification without taking an approach that would also result in concentrated risk to any GPs,” Amon said.
Amon also stressed the wide spread between upper and lower quartile returns in private equity.
“It’s critically important to the successful implementation of a due diligence process that we identify differentiated GPs that demonstrate investment discipline in the multiples they pay for companies and in the use of leverage,” he said. “This differentiates GPs with the team and resources that can achieve value-added operational improvements and to invest opportunistically in the business for better long-term results.”
The council approved both changes.
At the same meeting, Amon presented a returns report for all the division’s asset classes, but warned that market volatility has meant that it will be a few months before the true impact of that volatility on its private holdings will be known.
“Returns for private market assets are not updated on a timely basis. Instead, the valuations and returns reflect information as it becomes available, with market values generally reflecting up-to-date cash flows but dated valuations,” Amon said. “Near-term performance returns for private markets are not up-to-date, and benchmark returns are lagged, providing limitations on performance and analysis following a highly volatile financial market period of time.”
“While this is always the case, highly volatile markets have magnified these issues,” he went on. “While we’re not able to provide complete information until valuations have been completed, we can continue to keep you up-to-date on key factors impacting the pension fund’s return.”
New Jersey confirmed that Jared Speicher has taken over as interim head of private equity and permanent head of private credit following the retirement of Robin Clifford. Clifford announced her departure at the last meeting, as Buyouts reported. She has since joined Franklin Templeton Private Equity, as Buyouts reported.
Action Item: read the agenda for New Jersey’s State Investment Council July 22 meeting here.