Oregon pension system ponders sale of some pre-2009 PE funds

  • Pension is over-allocated to private equity
  • Pre-crisis funds make up more than half of its exposure
  • Staff calls GP restructurings “time consuming and potentially value destroying”

The Oregon Investment Council may unload some of its pre-2009 private equity funds on the secondary market, according to a private equity investment plan included in the council’s February meeting materials.

At year-end, Oregon’s $68.7 billion retirement fund was more than 3 percentage points above its target allocation to private equity, which it cut to 17.5 percent last year, according to retirement system staff reports.

More than half of its private equity portfolio’s exposure is locked up in pre-2009 vehicles, many of which underperformed and may be restructured as they near the end of their fund lives, the staff report said.

Oregon staff appears to hold GP restructurings in low regard, referring to the complex transactions as “extremely time consuming and potentially value destroying for LPs,” in the investment plan. A secondary sale may offer the pension greater value for its holdings.

“Given the substantial value remaining in [the retirement fund’s] long-dated fund portfolio as well as the increasing monitoring burden as end-of-life issues become more complex, staff recommends exploring solutions for this portion of the program over the course of 2016,” Oregon staff wrote.

In an email, spokesman James Sinks wrote: “The pacing study is part of an overall strategy to effectively manage a maturing portfolio. The strategy is in the early planning stages, and it includes several potential options, such as a secondary sale of some kind. However, it is too soon to say which options will be employed, or how.”

In addition to pursuing a possible secondary sale, Oregon’s private equity investment plan also outlined its commitment pacing for the next several years. The retirement system expects to commit between $2.5 billion and $3.5 billion annually to private equity for the next several years, according to the presentation. The retirement system committed $2.3 billion to the asset class in 2015.

Oregon will commit to 10 to 15 funds per year and will likely cap its fund allocations at $500 million. New commitments will include re-ups as well as allocations with new managers.

The Oregon Investment Council will also continue to explore forming separate accounts with certain GPs this year, but “this area is an unlikely focal point for staff in 2016,” according to the investment plan.

“Staff continues to explore options with GPs, but the benefits attributed to some peer models do not (in staff’s opinion) sufficiently offset increased concentration and illiquidity risks,” staff wrote.

Oregon’s private equity portfolio was valued at approximately $14 billion as of December 31, according to investment reports. The portfolio delivered a 15.6 percent internal rate of return since inception as of September 30.

Action Item: For Oregon’s private equity investment plan, visit http://1.usa.gov/1KsBodv