OLYMPIA, Wash. -- The Washington State Investment Board plans to boost its private equity program during the next two years, committing new assets of $800 million a year, said Ashu Rajbhandari, the fund's new senior investment officer for private equity.
The goal is to increase the program to 15% of the fund's $45.7 billion in assets. As of Dec. 31, the fund had commitments of $6 billion; $2.7 billion was invested, Mr. Rajbhandari said.
The system's program already has hit the ground running this year, making $550 million in new commitments last week.
Trustees approved a commitment of up to $150 million in Madison Dearborn Partners II, which does both turnarounds and buyouts of companies with market capitalizations of up to $500 million, and a commitment of $400 million to Kohlberg Kravis Roberts' first European buyout fund.
The pension fund committed $2 billion to new private equity deals in 1998, completing a number of those contracts in the final weeks of the year.
The new deals included:
* $25 million to Astorg Fund II, a French firm that helps turn around troubled companies;
* $25 million to Technology Crossover Ventures Fund III, a venture cap firm that invests in technology companies located in Silicon Valley; and
* $25 million to Spectrum Ventures II, a venture capital fund investing in wireless companies.
Washington State is no stranger to private equity investments. The pension fund has been investing in the asset class since 1980, but began to raise its stake in a big way only in 1996, after an asset allocation study showed a larger program would improve total returns, said Jim Parker, executive director.
"Our mandate is to get the maximum return at a prudent level of risk," Mr. Parker said.
More than one-third of the Washington system's private equity portfolio is in buyout funds, with some $2 billion committed to various KKR funds that invest in the United States, Mr. Rajbhandari said.
Another $440 million is split among several other buyout funds, including Clayton, Dubilier & Rice Inc.; Code, Hennessey & Simmons Inc.; and The Cypress Group.
The program has been a great success, Mr. Rajbhandari said, returning around 18% a year since inception. He plans to continue the current strategy, which was developed by his predecessor, Terry Blaney, who left in May to run the $1 billion private equity program at Delta Airlines Inc.
"The goal is to be very diversified," said Mr. Rajbhandari, who expects to make more commitments to venture capital in early, middle and late stages as well as to international private equity deals. Around 24% of the private equity portfolio is committed internationally, 14.73% is invested, mainly in Europe, through HarbourVest International and Charterhouse Group International. The fund has no private equity investments now in Latin America or Asia.
He added it's easier to get to the target allocation through buyout funds, which can take bigger commitments than can many venture cap funds, where the system has been committing $25 million at a time.
The private equity portfolio gained an annualized 32% for the three-year period ended June 30, which brought it a special recognition award from a peer group of 80 state pension funds for reaping the best returns among state funds.
"The CIOs of the pension funds meet quarterly and compare information on returns on an unofficial basis," Mr. Parker said.
Washington also posted the best returns among peers on its real estate portfolio for the period, with a 19.4% annualized return for the five-year period ended June 30.
The system, Mr. Parker said, is attempting to raise real estate to 9% of assets from its current 5%.
Washington State's asset allocation as of Dec. 31 was U.S. equities, 43.4%; international, 14.8%; fixed income, 29.2%; real estate, 4.8%; private equity, 7.2%; and cash, 0.6%.