NJ lifts PE target, commits to Warburg Asia fund

  • State’s PE target up to 12 pct from 10.25 pct
  • No longer treats debt-related PE as separate asset
  • Warburg raising $4.25 bln for China-Southeast Asia fund

New Jersey’s state pension system increased its PE allocation target to 12 percent and committed to a Warburg Pincus fund.

New Jersey State Investment Council, which manages $76.5 billion in pension assets, approved the asset-allocation change at its May 29 meeting.

The state pension previously had a 10.25 percent target allocation to PE: 8.25 percent to buyouts and venture capital, and 2 percent to debt-related strategies. The new framework no longer treats private debt as a separate allocation.

The change was recommended by consultant Aon Hewitt, which said that a “modest increase” in PE will help the state pensions capture the expected return premium for private investments.

The council also approved a commitment of up to $100 million to Warburg Pincus China-Southeast Asia Fund II, which has a $4.25 billion target.

The commitment will come with a management fee of 1.4 percent for commitments in the first six years, and 1.4 percent on the cost of investments in years six through eight, before decreasing to 1.25 percent in years eight through 10 and 1 percent thereafter, pension documents show. Warburg is expected to commit at least $100 million of its own capital to the fund, according to pension documents.

The New Jersey pension system previously committed to several Warburg Pincus funds, including Warburg Pincus Private Equity VIII, IX, X and XI.

Aon noted that New Jersey’s pensions remain a long way from being fully funded and depend highly on state, local and employee contributions.

The more poorly funded state pension plans face liquidity risks in the next five to 10 years, especially if state appropriations don’t keep pace with pension obligations. Liquidity concerns played a role in Aon’s recommendations, and the consultant noted that a higher risk allocation could improve funded status but could also meaningfully increase the volatility of returns, which is especially dangerous for underfunded plans.

The state’s 75 percent allocation to return-seeking assets, including private equity and public equity, is an appropriate target for a fund with a large deficit and a long-term horizon, Aon said.

The state pension system discussed the denominator effect in February, when its PE and private debt allocation was 11.86 percent. The pension system exceeded a 12 percent limit for private equity on two dates in December as public markets were hammered, driving down the value of the total portfolio except for illiquid private equity.

Action Item: Read the materials from NJ’s latest investment council meeting here: https://bit.ly/2QDanK3