The country's 200 biggest pension funds continued to increase defined benefit money invested in alternative assets, but at a much slower pace, suggesting larger pension funds already have met or are close to meeting their targets.
Equity real estate grew by a market-adjusted 3% to $73.8 billion for the year ended Sept. 30, from $64.7 billion at Sept. 30, 1996.
Money invested in buyout, venture capital and private equity partnerships also increased, although accounting for growth and declines is difficult because of the lack of a widely accepted benchmark for the investment class.
Among the top 200 pension funds, the amount of money invested in buyouts grew 30% to $17 billion from $13.1 billion for the year ended Sept. 30. Money invested in venture capital increased 25% to $13.3 billion from $10.6 billion.
The overall amount of money invested in private equity decreased slightly to $12.31 billion from almost $12.4 billion a year earlier, because of a decline in domestic private equity. International private equity rose 64%, however, to $1.4 billion from $854 million.
The investment activity at the $47 billion Public Employees' Retirement System of Ohio is consistent with the theme that international private equity is preferable to domestic deals among America's largest pension funds.
The pension fund began investing in private equity two years ago, yet it has no investments domestically, said Joel Buck, chief investment officer.
Ohio Employees currently has all $230 million of its private equity money invested internationally.
"The returns are higher, and that has been our focus," Mr. Buck said.
Others preferring international private equity to its domestic counterpart include the pension funds for USX, IBM, GTE and the Public Employees' Retirement Association of Colorado.
The $11.6 billion pension fund for USX Corp., Pittsburgh, reported $225 million in international private equity but only $58 million in domestic private equity; the $53.1 billion pension fund for IBM Corp., Stamford, Conn., reported $185 million in international private equity and $50 million invested domestically.
Stamford-based GTE Investment Management Co., which manages the $20.2 billion pension fund for GTE Corp., and the Denver-based $23.2 billion Colorado Employees' fund reported their respective $132 million and $125 million private equity portfolios were invested internationally.
The $6.4 billion pension fund for Eli Lilly & Co. reported its assets invested in domestic and international private equity grew 121% to $159 million from $72 million a year earlier.
Michael Neal, an adviser with the Indianapolis-based fund, attributed the growth to the performance of the fund's investments.
"We have a couple that have had significant appreciation that haven't been liquidated," he said. "We did make some new investments, but most of the growth came from successes with the investments."
Money in buyout funds increased as large partnerships raised in 1996 began making capital calls on the pension funds that committed to the funds.
Such was the case with the $6.5 billion pension fund for Northwest Airlines.
The Minneapolis-based fund reported a 108% increase in the amount invested in buyouts as commitments the fund made a year ago were now being invested by the general partners, said Gary Martin, director-pension investments.
"The percentage increase was large because the base it was coming from is small," said Mr. Martin. Northwest reported $123 million invested in buyouts as of Sept. 30, compared with $59 million a year earlier.
The $28.1 billion Oregon Public Employes Retirement Fund, Salem, reported a 123% increase in the amount invested in buyouts, to $2.4 billion from a little more than $1 billion.
The $71.9 billion Florida State Board of Administration, Tallahassee, made an initial foray into buyouts, investing $708 million.
The $6.8 billion Southern Co. Services Inc. pension fund increased its investment in buyouts and venture capital during the year ended Sept. 30, and expects that activity to continue into 1998.
The Atlanta-based fund's investment in buyouts increased by 2,000% to $42 million from $2 million; venture capital investments increased 171% to $76 million from $28 million.
"It's getting bigger than that," said Michael Forestner, senior trust analyst. "We are just getting ramped up, and a lot of new money is going out.
"We were at $200 million of commitments when I got here in late 1995. We will be at $600 million of commitments by June of 1998."
The $32.2 billion pension fund for E.I. du Pont de Nemours and Co. Inc. reported its venture capital assets increased 56%, to $114 million Sept. 30 from $73 million a year earlier.
Carmen Gilotti, an analyst with the Wilmington, Del., pension fund, said the increase resulted from distributions received from some investments and reinvested into existing venture investments.
"In reality our venture grew slightly," he said, "but it doesn't represent any new commitments to the venture area.
"We have consistently been value players, and we invest in the venture capital area primarily through secondary purchases."
Equity real estate investments continue to improve performance as the NCREIF-Property Index posted a total return of 10.5% for the year ended Sept. 30. But the demand for real estate among the largest funds barely nudged.
Some funds, the smaller in the Top 200 in particular, decided to abandon real estate even as the fundamentals had improved.
The $13.2 billion pension fund for Exxon Corp. reported its real estate declined 46% to $71 million at Sept. 30, 1997, from $132 million a year earlier.
The decline was due to the liquidation of a real estate partnership in which the Irving, Texas-based pension fund had invested, said James Bayne, manager-benefits finance and investments.
"We are not adding to real estate," he said. "As things run off, we have been shifting (money) to venture capital."
The $12.7 billion pension fund for Eastman Kodak Co. reported a 23% drop in its equity real estate investments, but the fund is not abandoning the asset class, said Robert Spooner, pension investment manager with the Rochester, N.Y.-based fund.
"Our allocation to real estate in 1996 was 13% to 14%," he said. "It is now down to 11%.
"The reason for that is the real estate markets have recovered nicely and our partnerships have been liquidating the underlying real estate assets.
"We are continuing to commit to new partnerships. We are not withdrawing."
The $33.9 billion Washington State Investment Board reported real estate equity increased 56% to almost $1.2 billion at Sept. 30 from $749 million a year earlier.
"We have seen strong appreciation and we put money to work," said Christopher Ailman, chief investment officer of the Olympia-based fund. "We are in two or three funds that are ranked one or two in returns so I am not surprised."
Private market investments are expected to be 24% of Washington's portfolio by 2001, and the find is "slowly ramping up" to meet that target.
"We are trying to be more opportunistic instead of throwing money at the target," Mr. Ailman said.
The $4.4 billion Montana Board of Investments, Helena, reported a 73% increase in equity real estate in its defined benefit plan, but the investment was made in public real estate investment trusts, said James Penner, chief investment officer.
The pension fund reported $130 million invested in REITs and one office building as of Sept. 30, compared with $75 million a year earlier.
Although REITs are common stock, Mr. Penner said the pension fund is going to establish REITs as a separate portfolio distinct from other public equities.