Oregon PE outperforms peers, but at higher costs

  • CEM finds Oregon’s costs nearly 50 pct more than peer universe
  • Costs still less than expected, given $69 bln pension’s mix of assets
  • Oregon Investment Council commits up to $200 mln to MBK

Oregon Public Employees Retirement Fund’s private equity portfolio rang up almost $275 million in fees and internal costs last year, according to a report from consulting firm CEM Benchmarking included in the state investment council’s Oct. 26 meeting materials.

The PE portfolio, which represented around 19 percent of Oregon’s assets in the period measured by CEM, represented more than half the $69 billion pension system’s total investment costs in 2015. The total does not include carried interest collected by the pension system’s fund managers.

Oregon’s typical allocation to PE is almost double the average allocation held by its peer group, which includes 17 public pensions with $24 billion to $89 billion of assets, the CEM report said.

PE is one of the most expensive asset classes for public pensions. And Oregon’s comparatively high allocation to private market assets, which include real estate and real assets, pushed the retirement system’s investment costs 45 percent higher than the median for its peer group.

Independent of its peers, however, Oregon’s private markets were lower than what CEM Benchmarking would expect of an institution with a similar mix of assets, the report said. And even with significantly higher costs, Oregon’s total portfolio netted higher returns than those generated by its peers, CEM reported.

Oregon reduced its target allocation to private equity to 17.5 percent from 20 percent last June amid concerns over tightening fund terms and higher valuations. The retirement system held 19.8 percent of its assets in PE as of Sept. 30.

In addition to reviewing CEM Benchmarking’s report, the investment council approved a $200 million commitment to MBK Partners’ latest fund for buyouts in northern Asia. The commitment, Oregon’s first with MBK, remains subject to final negotiations with staff.

MBK Partners Fund IV is targeting $3.5 billion with a $4 billion hard cap, according to Oregon documents. The fund will take 10 to 12 control positions in portfolio companies with enterprise values of as much as $700 million in Korean, Japanese and Chinese companies.

Action Item: More about Oregon’s PE portfolio and investment costs: www.oregon.gov/treasury/pages/index.aspx