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North Carolina charts $1.5 bln boost to PE portfolio

Pension System: North Carolina Retirement Systems

Total Assets: $87.4 billion

PE Assets: $3.8 billion

Current PE Allocation / Target: 4.3% / 6%

Chief Investment Officer: Kevin SigRist

Looking ahead, the North Carolina Retirement Systems may make annualized commitments to private equity of about $1.2 billion to $1.6 billion, according to a presentation by the pension system.

The allocation policy changes already have been implemented by State Treasurer Janet Cowell, who shared the new targets with the pension system’s investment advisory committee at a meeting in May. The changes take effect on July 1.

The pension system cut its official private equity allocation target to 6 percent from 6.5 percent. But the lower number still represents a 1.7 percent hike in the asset class from its actual, current allocation of 4.3 percent.

Under its new guidelines, North Carolina is about $1.5 billion short of its private equity allocation. In other major asset classes, it also is $1.5 billion below its intended investment level in opportunistic fixed income; $1.8 billion below its target for core real estate; $1.8 billion below its target allocation for inflation-sensitive investments, and $400 million below its cash allocation goal. By contrast, the retirement system is $2.4 billion overallocated to public equity and $3 billion overallocated to investment-grade fixed income.

In a summary prepared by the treasurer for the investment advisory committee, the pension system said the U.S. buyouts business is seeing robust credit supply and strong equity capital flows, which are boosting initial public offerings and the market for mergers and  acquisitions. As a result, buyout valuations are seeing a “significant” rise.

“Debt availability plus friendly terms plus more reliance on financial engineering via greater leverage levels equals higher entry valuations and lower longer-term returns for new dollars,” according to the presentation. Yet private equity offers some attractive sub-sectors: secondaries, co-investments and distressed investments; venture capital and growth equity.

Among buyout funds, the pension system said it will seek out managers that are not reliant on financial engineering and demonstrate operational expertise; offer deep industry experience as opposed to generalists; offer experience in various parts of the capital structure, and have a mid-market focus, rather than larger deals. European exposure is a plus, where “more attractive valuations should be explored,” the pension system said.

Separately, North Carolina Retirement Systems approved a $150 million commitment to Crestview Partners III LP, the latest buyout fund from Crestview Partners. The New York-based firm, founded by former executives at Goldman Sachs and Morgan Stanley, is targeting $3 billion for its largest fund yet, according to a report by sister website peHUB. The firm focuses on mid-market companies in the financial services, media, health care and energy sectors. The pension system’s commitment to the fund came at its April 28 meeting.

Also this year, the pension system committed $300 million to Marathon Currituck Fund, a credit strategies pool from Marathon Asset Management. It also committed $60 million to Intervale Capital III from Intervale Capital and $125 million to Orion Mine Finance Fund 1-A from Orion Resource Partners. The Intervale and Orion Resource investments were grouped in the pension system’s inflation portfolio.