The demand for private equity investing by tax-exempt institutions will hold up its side of the supply-demand equation in 1997.
Several institutions that increased their allocations to alternative investments in 1996 will be making commitments to private equity partnerships this year, spurring another record year of fund raising by those partnerships.
Private equity partnerships raised $32 billion in 1996, according to Asset Alternatives Inc., Wellesley, Mass., which monitors their activity. Several partnerships are seeking at least $1 billion. If last year is any indication, many of them will exceed their targets.
But investors wanting to make initial private equity investments with the established and best-performing partnerships will find the door shut, industry professionals said. The general partners are going first to investors in their previous funds, and if those investors reinvest sufficient money, the door is closed to new investors.
"It's a problem for pension funds just getting into the asset class," said Joseph O'Reilly, vice president and senior consultant in the Boston office of Dahab Consultants.
Mr. O'Reilly represents the $140 million Bristol County Retirement System, Taunton, Mass. The retirement system earlier this year contributed $2 million to the Charles River Venture Fund VIII.
"We were lucky," said Mr. O'Reilly. "Charles River's previous fund was very successful.
"Rumors were out in December and January that there would be a new fund. In February, they (the Charles River partners) started calling to say they are raising money."
Bristol was able to get into the new fund, but another of Mr. O'Reilly's clients was not as fortunate.
"That is becoming more of a common story," he said.
Lower returns might also be a common story going forward. Investors realize returns that attracted attention to private equity will not be as robust. Returns also might drop as investors closed out of top performers settle for newer, unproven funds.
"We recognize we are late relative to our peer institutions," said Robert B. Taylor, vice president and treasurer of the $400 million endowment for Wesleyan University, Middletown, Conn.
Wesleyan undertook an asset allocation study late last year with the intent of increasing its allocation to private equity investments. Mr. Taylor declined to discuss the study's recommendations, which was being conducted by Boston-based Cambridge Associates Inc., its consultant.
"One has to question the ability (of partnerships) to continue to reach expectations of 15%.
"We intend to put more money in alternative investments," said Mr. Roberts. "It will be done over time and in the right deals."
The Wesleyan endowment last year undertook a study to determine a new asset allocation, which would have increased the commitment to private equity. Mr. Taylor declined to discuss the results of that study.
The $4.4 billion Rhode Island Retirement System, Providence, also is taking a measured approach to funding its increased allocation to alternative investments.
The fund hired Pacific Corporate Group a few years ago as its alternative investment consultant, said Steve Klamkin, a spokesman. The fund subsequently boosted its allocation to alternative investments to 7.5%, he said.
Last year the fund committed to four private equity partnerships: OCM Principal Opportunity Fund, Providence Equity Partners, CWB Capital Partners Fund and Boston Venture L.P. V.
"We are only half-way there," said Mr. Klamkin.
Future commitments will be made on a "case-by-case" basis, Mr. Klamkin said. He expects the fund will meet its target over the next two to three years.
The Pennsylvania State Employes' Retirement System, Harrisburg, is expected to be busy in 1997 and beyond as it moves toward fulfilling its 6% allocation to alternative investments.
Private equity is expected to play a significant role in completing the allocation. At the end of 1996, the pension fund had a 1.2% allocation to alternatives.
According to Pennsylvania's plan, the staff and its consultant Cambridge Associates will search for five or six "quality" partnerships during 1997 and 1998, committing $400 million apiece in those two years. An emphasis will be placed on follow-on commitments.
Efforts will be made to increase commitments to international alternative investments, including those in emerging markets countries.
Other investors that are or might be considering increased allocations to private equity are: the New York City Employees' Retirement System, the University of Washington endowment and Chicago's Northwestern Memorial Hospital.
The New York City Employees' Retirement System hired Pacific Corporate Group as its alternative investment consultant last year. Trustees of the $45 billion pension fund are considering expansion of the alternative investment program beyond financing of apartments.
Officials with the University of Washington endowment, Seattle, said late last year they were searching for alternative investment managers and were considering raising the allocation to alternatives.
Under the current 10% target, the fund had $15 million that was not committed. It was considering partnerships for leveraged buy-outs, bankruptcies and venture capital.
A 15% target was being considered for alternative investments.
Northwestern Memorial Hospital, Chicago, with $700 million in endowment and pension assets, said it was increasing its commitment to alternative investments this year.
The fund hired four private equity and venture capital managers as part of the expansion plan, said Thomas Satkus, assistant treasurer. The four managers brought the hospital's allocation to $45 million, $4 million short of its target for the combined funds.
Mr. Satkus declined to say how much the hospital will raise the target, but noted it had considerable room.