Oregon’s private equity allocation soars with denominator effect

Public pensions are contending with the dreaded denominator effect as the value of their public holdings plunges in the volatile markets.

The Oregon Public Employee Retirement Fund’s private equity allocation has ballooned to more than 27 percent in the first quarter of 2022, making it the $96.7 billion fund’s largest asset class.

Public pension funds have run into the dreaded denominator effect as the value of their public holdings plunge in the volatile markets, while their private equity assets, valued on a quarterly basis, take much longer to change, effectively boosting their percentage of the overall fund.

While some pension systems have taken measures in response to this dynamic, Oregon will stay the course as it expects private equity valuations to fall in the coming months.

“We should expect those numbers to come down in the second quarter given the difference in the market environment,” said Paola Nealon, a principal at consultant Meketa.

Currently, private equity has the largest allocation in the portfolio, slightly ahead of the 26 percent dedicated to public equities, according to Meketa’s presentation. The fund targets a 30 percent allocation to public equity and 20 percent to private equity.

Private equity performance has also been strong, further strengthening its place in the portfolio. The asset class posted performance of 7.4 percent for the quarter, which drove much of the fund’s return of 1.2 percent, Nealon said.

Meketa managing principal Allan Emkin said he was not too worried about a steep drop in private equity valuations next quarter.

“Private equity historically shows up in your reports at half the level of volatility as public equities. We will not see big drawdowns because the pricing mechanisms have nothing do to with the fundamental economics of the underlying assets,” Emkin said.