Equity alternative investments by defined benefit plans among the largest U.S. pension funds rose a hefty 28% in the year ended Sept. 30, according to the latest Pensions & Investments Top 200 survey.
In contrast, real estate equity holdings grew only 8% to $79.7 billion from $73.8 billion during the period. When the 18.2% increase in the NCREIF Property Index is factored in, however, real estate equity holdings fell 9% in the year ended Sept. 30.
The buyout category registered the biggest gains year after year among the alternative classes tracked by P&I, gaining 50% to $25.4 billion as of Sept. 30 from $16.9 billion. The private equity category was second, rising 33% to $16.4 billion from $12.3 billion a year earlier.
Venture capital, meanwhile, slid 6% to $12.4 billion from $13.2 billion.
YOU SAY TOMATO, I SAY ...
The figures can be deceptive however, because many pension funds have been changing the way they view their alternative asset programs. Several now group private equity, buyouts and venture capital in one category known as alternative asset investments. Or they have buyout and venture cap funds, but call them all private equity.
Moreover, some pension funds, such as the California State Teachers' Retirement System, Sacramento, include real estate with private equity investments and call the entire category private investments or alternative investments. The categories previously were considered separate.
And in some cases, the classification changes from one year to the next. Marvin Damsma, now director, trust investments, at BP AMOCO PLC, Chicago, said in the current survey Amoco Corp.'s $67 million in real estate was reported separately, but at other times the company had included it with alternative investments. The size of the real estate holdings has not changed from the previous survey, he said.
With the semantic problems in mind, if the defined benefit investments made last year in alternative equity assets and real estate are calculated together, the increase was 15% to $134.1 billion from $116.4 billion.
AIMING FOR TARGETS
The overall gains in alternative assets came primarily from appreciation and additions to existing programs, as pension funds increased their investments to bring them closer to their allocation targets.
For many, the asset class is still relatively new, and they have been making a big push to get invested.
The State Teachers Retirement System of Ohio, Columbus, for example, started its alternative asset program only a year ago, and had $400 million invested in a range of alternative programs by Sept. 30, said Herbert L. Dyer, executive director of the $44 billion pension fund.
"We have something like one-half a billion to $1 billion in commitments, and are trying to get (the program) to 1% of assets." The program is very diversified, and includes international partnerships as well as domestic, along with mezzanine financings and even some gold, which is being held through mining company stocks, Mr. Dyer said.
At the California Public Employees' Retirement System, Sacramento, there also has been a big push to expand the alternative asset program, said Brad Pacheco, spokesman for the $134 billion fund. The program now stands at 3.1% of assets, with a target of 4%. Mr. Pacheco cited a June 30 report that said the portfolio included 99 limited partnership commitments, three direct investments and eight company specific co-investments, compared with 82 limited partnership commitments, two direct investments and six company specific co-investments in 1997.
The real estate portfolio, which is reported as a separate asset class at CalPERS, slid to $6 billion as of Sept. 30 from $6.3 billion the previous year because it was restructured.
"We have gotten rid of dead weight and hired a lot of new managers to form little partnerships with us, and now they are out in the market looking to buy," Mr. Pacheco said.
Real estate, he said, represents 4.7% of the California fund's assets, still shy of the 6% target allocation.
RAISING THE BAR
The Washington State Investment Board, Olympia, has been building both its real estate and alternative investments, said Scott Huntley, executive analyst at the fund.
"The board decided to raise the real estate allocation, which had been lagging. The goal was to reach 6.3% of assets by the end of 1998, and 9% eventually," Mr. Huntley said.
By Sept. 30, the fund was at 5%.
A lot of new commitments are about to be funded, including $200 million to Olympia Partners and another $200 million to PRICOA in a European investment program. The real estate assets rose to $1.7 billion 1998 up from $1.2 billion in 1997.
The fund's alternative investment allocation program also jumped year over year, rising to $3.3 billion from $2.7 billion the previous year. It now represents around 9% of assets, closing in on its target of 10.9%.
Good opportunities in alternative investments spurred an increase in commitments at the $23 billion Commonwealth of Pennsylvania State Employes' Retirement System, Harrisburg, said spokesman Geoffrey Yuda. Buyout investments rose 185% to $629 million from $221 million, while venture cap investments gained 39% to $416 million from $299 million, with half of the investments going to existing managers that had started new funds, including Clayton, Dubilier & Rice VII; GTCR Golder Rauner VII and Kelso VII.
In addition, the fund has been building its real estate portfolio to eventually reach 10% of assets in 2002, Mr. Yuda said. It rose to $1.9 billion as of Sept. 30, up from $1.6 billion the previous year.
The alternative investment program at the State of Michigan Department of Treasury Bureau of Investments, Lansing, surged $1.1 billion in 1998 to $3.7 billion, up from $2.6 billion the previous year. The biggest growth came in special situation partnerships, jumping to $1.57 billion from $820 million and in leveraged buyout funds, which rose to $1.48 billion from $1.29 billion, said Alan Van Noord, director of investments at the fund, which had $45 billion as of Dec. 31.
Michigan has been investing in the asset class since 1982, he said. As of Sept. 30, such investment accounted for 8.9% of the portfolio, compared with 6.6% a year ago. The target is likely to remain at 8%, which was reached at the end of November.
Other pension funds that are still far away from their target goals include U S WEST Inc., Englewood, Colo. and the State of Hawaii Employees' Retirement System, Honolulu.
Thomas Simonson, manager, private equity at U S WEST, said the $17 billion pension fund's alternative asset program now accounts for 3.5% of assets, and the target is 5%. Combined investments in equity alternative asset classes climbed to $401 million from $272 million the previous year. U S WEST invests through funds. "We have been investing in U.S. buyout funds as well as smaller venture capital funds. We're also looking at opportunities internationally, but in developed countries such as Europe rather than in emerging countries," said Mr. Simonson.
At the Hawaii system, real estate doubled to $544 million from $264 million a year earlier. Chief Investment Officer Nathan Fischer said the fund hired INVESCO Realty Advisors and Clarion/CRA to help raise the real estate allocation to 10% of the $9.1 billion fund. The allocation currently stands at 6%. Each manager is running a core real estate portfolio, with the discretion to acquire properties in a range of categories on an opportunistic basis.
Hawaii also is building its alternative asset component to represent 3% of assets. So far, 1.5% of total assets has been committed to Hancock Timber Resource Group and another 1.5% to Abbott Capital Management, which is putting the pension fund in venture capital, special situation and buyout funds. The fund reported $16 million in alternatives as of Sept. 30. Interviewed recently, Mr. Fischer said, "We have about $130 million in commitments, with about $23 million invested so far."