Oregon to commit up to $3.5 bln to private equity

  • Oregon to commit $2.5 bln and $3.5 bln
  • Average $1.5 bln commitment per vintage year from 2009-2014
  • $69 bln pension targets co-investments, separate accounts

Oregon Investment Council is planning a significant, sustained buildup in its dollar exposure to private equity, according to pension documents.

Oregon plans to allocate $2.5 billion to $3.5 billion to PE in 2017, a range that brackets the $3 billion it allocated to the asset class last year, presentation materials from the council’s Feb. 1 meeting show.

The council, which oversees the portfolio of Oregon’s $69 billion public pension system, will likely make 10 to 15 commitments of as much as $500 million, with the average commitment in the $250 million to $300 million range.

Prior to 2016, Oregon hadn’t allocated more than $3 billion to funds in any individual vintage year since 2008, according to pension documents. Its expected pace for 2017 roughly doubles the $1.5 billion of annual commitments Oregon averaged for 2009-2014 vintages.

A decade ago, Oregon’s “volatile vintage pacing” resulted in overexposure to funds raised between 2005 and 2008, pension documents say. As a result, “performance for the [retirement fund’s] program and the private equity asset class as a whole have suffered from over-commitments to weak vintage years in the second half of the 2000s,” investment staff wrote.

A little less than a third of the $13.9 billion portfolio’s total exposure remains locked up in fund vintages from 2007 or earlier, according to pension documents. That segment of the portfolio includes massive stakes in several of the industry’s largest pre-crisis vintages, including megabuyout funds raised by Apax PartnersApollo Global ManagementKohlberg Kravis Roberts and TPG. Many of those funds have yet to generate double-digit internal rates of return.

Diminished returns, along with liquidity concerns and limited staff resources, caused Oregon to throw up the caution flag in 2015. The ever-increasing number of GPs made it “harder on staff to pick the winners,” said CIO John Skjervem in a recording of its June 3, 2015, investment council meeting.

“We’ve lost our first-mover advantage. We’re no longer the 800-pound gorilla, and we can no longer rely on persistence [of private equity returns] as much as we had been,” Skjervem said in the recording.

Even so, the PE portfolio continues to be cash-positive, pension documents show. The retirement fund’s portfolio delivered $3.5 billion in distributions last year, beating out total capital calls by $1 billion. Last year marked the fifth straight year distributions outpaced capital calls.

Oregon could not be reached for comment.

Lower fees, broader strategies

In addition to its traditional fund commitments, Oregon also plans to target opportunities to reduce the overall costs of its portfolio.

Last year, CEM Benchmarking found Oregon’s overall portfolio costs to be almost 45 percent higher than those of its peer institutions, Buyouts reported. PE-related fees and expenses accounted for more than half those costs.

Investment staff will continue to focus on situations where larger commitments or committing to the first close could lead to fee discounts, according to pension documents. PE firms occasionally offer lower fees to investors who commit early or in larger amounts.

The retirement system will also look for opportunities to invest alongside fund managers with sidecar vehicles, which give them greater say in the contents of their portfolio at lower costs, according to the investment plan. Oregon may pursue low-term co-investments as well.

The pension will also implement a “more regimented and documented” monitoring process for its managers, which may include additional information-technology monitoring, according to the report. Oregon plans to have consultant TorreyCovetake on some of the administrative burdens associated with the more mature holdings in its portfolio.

Oregon held 19.9 percent of its assets in private equity as of Dec. 31, 2.4 percentage points more than its 17.5 percent target allocation.

Action Item: For more information about Oregon’s investment portfolio, visit www.oregon.gov/treasury