Oregon defends paying high PE fees, commits to Genstar

Oregon Treasury committed $350 million to private equity and credit investments, and its chief investment officer made the case that paying high PE fees has helped add billions to the state’s retirement fund over the years.

The investment council, which manages the $74.5 billion state retirement fund and its $1.5 billion common school fund, committed $200 million to Genstar Capital Partners IX, which closed on $5.5 billion on in February, and $150 million to Northern Shipping Fund IV.

It also committed $250 million each to two hedge funds, Bridgewater Optimal Portfolio fund and GMO Systematic Global Macro fund.

CIO John Skjervem discussed recent performance for Oregon’s retirement fund, which has been in the top decile of funds in the Wilshire Trust Universe Comparison Study in all time measured periods, from one-year returns to 20-year returns.

Over the longer term — for investment results for seven, 10 and 20 years — Oregon has been in the top 1 percent.

Compared with the median fund’s returns, Oregon’s outperformance has added almost $10 billion to the fund over 20 years and over $2 billion over the most recent one-year period.

And compared with a more passive portfolio of 70 percent stocks and 30 percent fixed-income, the disparity was even higher, with nearly $14 billion added over the past 20 years, according to meeting materials.

Private equity and other high-fee active management strategies have been a big part of Oregon’s performance, Skjervem said at the council’s March 13 meeting.

“Remember that next time somebody comes up here and criticizes us for paying a lot of fees to private equity managers, or criticizes us for not indexing, we would be billions of dollars worse off as a state, we would be billions of dollars worse off as a fund, were we to follow that type of advice,” Skjervem said.

“We spend millions of dollars in fees, we spend millions of dollars in carried interest, and we spend millions of dollars on active management fees in the public side of our portfolio, and in exchange we’ve gotten billions. That’s a pretty good trade-off.”

PE returns don’t, however, always justify high fees. Oregon’s Common School Fund, with about $1.5 billion in assets, has been dragged down by lower PE performance even as the much larger retirement fund has been boosted by it.

The school fund’s private equity portfolio has suffered from poor manager selection and vintage-year concentration.

About 45 percent of the school fund’s PE commitments were made in 2007 and 2008, when the school fund first added PE to its portfolio, and about 45 percent of the portfolio was invested between 2013 and 2015.

Most of the 2007 and 2008 commitments went to funds that ended up being third-quartile performers, Senior Investment Officer Michael Viteri said.

“There was a problem-child vintage-year era, and that’s exactly what the common school fund experienced,” Viteri said.

Common School Fund has two PE investments in the pipeline right now, and it is also working on two alternative investments and one real estate investment.

The school fund currently has a 13.6 percent allocation to PE, above its 10 percent target, and it is below its 10 percent targets for alternatives and real assets.

The real assets and alternatives categories, which were added for the first time in 2017, are currently at 5.7 percent and 6.7 percent respectively, but Oregon’s investment staff expects to reach those targets by mid-to-late 2019.