PORTLAND, Ore. - An embarrassment of riches is behind the Oregon Public Employes' Retirement Fund's allocation to the new buy-out fund raised by Texas Pacific Group.
The $300 million placement - bigger than any Oregon has given any alternative equity manager except Kohlberg, Kravis, Roberts & Co. - was motivated partly by the need to re-invest the cash that poured back into the retirement system when KKR liquidated some of its positions last year.
"Their record, the quality of their people warrant it," Gerard Drummond, chairman of the Oregon Investment Council, which oversees the retirement fund, said of TPG, based in Fort Worth. "They're one of the quality shops out there."
Oregon reaped cash returns of about $1.06 billion last year from various alternative investments, said Jay Fewel, Oregon's manager for equity investments. Most of that came from KKR's selling down or out of it stakes in such companies as First Interstate Bank, Fred Meyer Inc., Red Lion Inns and American Re Corp.
That cash flow challenged the retirement fund to stay close to its maximum alternative equity target allocation of 15% - or about $3.6 billion - of the $24 billion pension fund.
Even with the TPG investment, Oregon's alternative equity placements "won't be over $2.5 billion," Fewel said. That puts the alternative equity allocation around 10%.
"It's getting increasingly difficult to keep our allocation," said Mr. Drummond. "It tends to push us toward looking at the larger funds."
Mr. Fewel and TPG principal David Bonderman described Oregon as an "anchor tenant" in the new fund, which at $2.5 billion is about three times the size of TPG's first fund. Oregon placed $50 million in that first fund in 1994, and calculates its gross internal rate of return so far around 60%.
That's a conservative figure, scaled back from TPG's own calculation of an 82% IRR. Even using extremely conservative assumptions, there's no way to describe the returns so far as anything less than "spectacular," David Graus, a consultant with the Pacific Corporate Group, told the Oregon commission. Pacific Corporate is the fund's consultant on alternative investments.
Oregon's pleasure at the returns from TPG's first fund, combined with its growing need to reinvest cash in alternative equities, led the state to press for an anchor position in the second fund.
Mr. Fewel said the state pension fund wanted to be in a position to invest in funds raised by the TPG partners. "They are obviously a group with considerable depth and they're going to be in the market for a long time," he said.
The principals of TPG formerly worked for the Robert M. Bass Group, investing more than $1.1 billion for that group from 1985-1992.
The first TPG fund invested in such companies as America West Airlines, Beringer Wine Estates and Ducati, the Italian motorcycle company.
The new fund is "way oversubscribed," Mr. Bonderman said. Jim Coulter, another TPG principal, said he expects the new fund to fuel about 20 deals during the next four years.
