While identifying challenges, Ohio Schools pension boosts PE target

School Employees Retirement System of Ohio will increase its target allocation to private equity to 14 percent for FY 2024.

Multiple LPs have increased their target allocations to private equity in recent months, showing a long-term bullish view on the asset class, even as the industry traverses a difficult exit market. LPs have also boosted targets to account for private equity exposure that have ramped beyond caps due to the denominator effect.

SERS Ohio approved the hike of its target allocation to private equity to 14 percent, up from 12 percent at its April board meeting. Buyouts reviewed a presentation from consultant Wilshire recommending the change to the $17.5 billion system’s asset allocation.

In its annual investment plan, distributed at its May 18 meeting, the system’s investment staff discussed the headwinds PE faces.

Fundraising and exit activity will remain at the dramatically reduced levels witnessed in the second half of 2022 in the near-term as high interest rates, inflation and slower economic growth continue to impede managers, the plan said.

At the same time, elevated valuations and expectations for sellers have resulted in higher prices for managers acquiring a portfolio company, the plan said.

The purchase price multiple stood at 11.9x in 2022, down from 12.3x in 2021 but up from 9x in 2011, according to the note.

“The intense competition for assets that has led to growth in purchase price multiples and made it very difficult for private equity firms to find and purchase companies continued in 2022,” the plan said.

Seller expectations and the amount of dry powder held by managers also boosted valuations, the plan said.

Top private equity managers focused on portfolio operations and value creation during the past three difficult years, which generates an “opportunity for investors to separate the top private equity firms more easily from the rest of the pack,” according to the investment plan.