CONCORD. N.H. - The $3.8 billion New Hampshire Retirement System is shifting some assets into a microcap strategy, using distributions from its venture capital allocation.
"We haven't identified all the funding for the microcap fund yet, but we will be financing some of our initial $5 million investment through distributions from venture-cap investments," said J.P. Singh, director of finance.
Mr. Singh said moving money into the public equity market from private venture capital results in more liquidity and less administrative work for New Hampshire.
He said the fund's alternative investment program has returned around 18% a year on an annualized basis since its inception five years ago. "We believe we can achieve similar objectives, if not the same, with microcaps, and at the same time we will get better liquidity. Even if returns are a little lower, they will be close to those in venture cap. Meanwhile it will reduce some of the administrative work."
Around $125 million of the system's committed capital has been invested in various venture funds. There is another $25 million that has been committed, but not yet invested. While the target allocation has been 5%, it never reached that. Instead, it was closer to 2% to 3%, Mr. Singh said. "We intend to keep the venture-cap investments we have, but will reinvest distributions in the microcap strategy."
Tim Dalton, chief executive officer and chief investment officer at the firm bearing his name, said he expects to see more pension funds moving away from venture cap and into value microcap, small-cap and midcap strategies.
That's because those public equities are now selling at a discount to private equities. "Until this year, they were selling at a premium. Now it's the other way around. As investors, we would rather own companies where there is liquidity.
"In the last year, there has been a big change. Small caps have been lagging large caps, which has caused small public securities to sell at a discount to private equities. Since the public vehicle is cheaper, why buy the private ones?"
This trend has spurred the firm to roll out a value fund highly concentrated in public companies whose market capitalization is no higher than $1.3 billion.
While other money management firms are expected to introduce similar funds, the concept has yet to catch on in a big way with the pension fund community. Several consultants said they hadn't heard of any trend toward moving venture capital distributions into public equities. "It could just be episodic," said Rodger Smith, partner, Greenwich Associates, Greenwich, Conn.
But Mr. Dalton is optimistic, observing, "Some 55% to 60% of all the funds committed to private ventures can't find enough good ideas to invest in. They will turn toward public markets instead because of the opportunities that exist there."
Liquidity is another major reason, added Layton Strater, a partner in Value Asset Management Inc., Stamford, Conn., Dalton's parent company.
Mr. Strater said pension funds can earn 80% of the return expected in venture capital by holding more marketable securities.
One money manager noted some of the private equity investments have become inefficient: "If a pension fund has money both with KKR (Kohlberg, Kravis & Roberts) and Apollo, the pension fund could be bidding against itself because each of those private equity managers is probably chasing the same deals. Investing in some of the small undervalued companies is a better option because they operate in a different sourcing pool."