Ohio Looks to Cut Venture Allotment

The Ohio Public Employees Retirement System (OPERS) is reducing its target allocation to venture capital investments, citing industry contraction and an oversupply of limited partner capital. The decision was made after consultation with OPERS advisor, Pacific Corporate Group, and was spelled out in a Nov. 3 memo from Greg Uebele, the system’s assistant investment officer for private equity.

OPERS didn’t begin investing in private equity funds outside of Ohio until 2002, at which time it allocated 4% of its $48 billion capitalization to PE. At the end of last year, its capitalization had risen to more than $59 billion.

Within that 4% allocation was a 25% target for venture capital, but only a scant number of VC firms raised new funds in 2002. Even when the market began to reemerge in 2003, OPERS remained on the sidelines, hamstrung by its lack of existing relationships with quality fund managers.

The system did manage to participate in three funds in 2004. They include CMEA Ventures’ sixth fund of $300 million; Essex Woodlands Health Ventures’ sixth fund of $400 million; and Granite Global Ventures’ second fund.

But despite getting in those funds this year, it had become clear to Uebele and others that the 25% figure was unrealistic.

“Under the 25%, we would have committed $1 billion to venture capital by the 2008/2009 year, but there really wouldn’t have been any responsible way to make that happen,” Uebele explains.

The revised plan includes a 15% allocation to venture capital, which should work out to between $125 million and $200 million of VC investments in 2005. The overall 4% allocation to private equity will remain, with a 10.5% net total return expectation.

To fill the gap left by the reduced VC target, Uebele said he expects a slightly increased emphasis on leveraged buyout funds, including mega-funds of $1 billion or more. OPERS has set a 15% net return target for its mega-LBO fund investments, even though the 10-year benchmark for such vehicles is just 7.3% (U.S.-only), according to Thomson Venture Economics (publisher of PE Week).

Current examples of such investments in the OPERS portfolio are Blackstone Capital Partners’ fourth fund of $6.5 billion; Charterhouse Capital Partners’ seventh fund of $3 billion; and Texas Pacific Group’s fourth fund of $5.3 billion.

In related news, OPERS has reduced its allocation to special situation funds from 15% to 10%, and increased its cap on investments in industry-specific funds from $50 million to $75 million.

Email Daniel.Primack@thomson.com