OPERS Doubles PE Target, Will Pledge $2B Per Year

The $50 billion Ohio Public Employees Retirement System, known as OPERS, recently raised its target allocation to private equity to 10 percent from 5 percent, said Louis Darmstadter, the pension fund’s private equity portfolio manager, although the actual allocation is currently less than 4 percent.

To reach this goal, the limited partner will likely be committing about $2 billion per year to private equity over the next five years, pledging to both new and old relationships with commitments ranging from $50 million to $300 million each.

Darmstadter doesn’t see many attractive private equity opportunities to pledge to now (so far this year OPERS has made only one commitment—a $180 million pledge to mega-fund Hellman & Friedman Capital Partners VII LP), so he’s looking to commit to what he calls unconventional private equity strategies. These could include secondaries, unfunded primaries and “portfolio strips,” meaning creating joint ventures with pension funds that are overallocated to private equity by providing them with the capital to fund their commitments.

In addition, Darmstadter is considering creating a separate account for making co-investments, which initially would be “certainly north of $100 million,” he said, although this idea has not yet been approved by the board. “It’s a way of building allocation in an environment where managers are not calling down capital,” he explained. With nearly $2 billion of unfunded private equity commitments, Darmstadter is feeling a bit frustrated with managers, saying that we all know why they are not putting the money to work, “but if you are trying to build allocation in this environment, it’s not a helpful situation. You could literally count the new investments on one or two hands that have been made so far in 2009.”

Currently buyout funds form three-quarters of the private equity portfolio, with 15 percent going to special situations, which includes distressed strategies, and 10 percent to venture capital. Darmstadter is considering rejiggering the sub-allocation to venture capital, possibly replacing it with a growth equity strategy, because it’s difficult to put large amounts of capital into venture commitments. Ohio currently doesn’t commit to mezzanine funds, but it may do so in the future.

Darmstadter hopes to increase his staff by one to three people over the next couple years to help with the increased work load involved with private equity investing. The LP uses Hamilton Lane as its strategy consultant, and Pacific Corporate Group and Strategic Capital Management for due diligence.

The changes recently made to the overall portfolio are a reaction to an overconcentration in domestic equities, causing the board to create a larger alternative allocation, now 25 percent of the $50 billion portfolio, versus the previous 14 percent. The target allocation to real estate rose to 10 percent from 7 percent, and the board approved allocations to hedge funds of 3 percent and infrastructure of 2 percent.