Venture capital investments among the 200 largest U.S. pension funds jumped 42% for the one-year period ended Sept. 30, 1999, to $17.6 billion from $12.4 billion a year earlier.
In large part, this surge was due to the incredible valuations that came in the wake of numerous venture-backed Internet-related companies that went public during the year.
However, pension fund investments in alternative asset classes on the debt side grew even more, with distressed debt investments topping the list. They surged a whopping 166% in the 12 months ended Sept. 30 to $1.8 billion from $672 million a year earlier. Mortgages also displayed enormous growth, gaining 108% to $26.2 billion from $12.6 billion in 1998.
Among the alternative investment categories listed in the Pensions & Investments survey of the 200 largest U.S. pension funds, real estate equity expanded the least, growing only 4.5%, to $83.4 billion. When adjusted for the 12.8% increase in the NCREIF Classic Property Index, the assets actually declined 7%.
In the private equity arena, which includes domestic and international buyouts, special situations and other private-market investments but excludes venture capital, assets grew 17% to $49 billion from $41.9 billion in 1998.
The California Public Employees' Retirement System, Sacramento, led the pack in 1999 with a total of $5.7 billion in alternative assets as of June 30, up 33% from 1998's $4.3 billion. The greatest growth came in venture cap, which increased to $702 million, up 4% from $673 million as of Sept. 30, 1998. The gains came because the system started investing in its program with Grove Street Advisors, Boston, according to Brad Pacheco, a CalPERS' spokesman. The arrangement calls for CalPERS, which had $156 billion in assets as of Sept. 30, to invest up to $350 million in a fund-of-funds vehicle specially created for the system.
"It was a banner year for venture cap," said James Bayne, manager of pension benefits at Exxon Corp., Irving, Texas.
He noted the $4.4 billion defined benefit plan has been investing in venture cap through San Francisco-based Horsley Bridge Partners funds-of-funds since 1988.
"We dollar average, and in the last year or so have received huge distributions from our older Horsley funds, Nos. II through V. Because the value has increased, the assets have increased," Mr. Bayne said. This raised the pension fund's assets in venture cap to $681 million, up a stunning 159% from 1998. As of Sept. 30, the allocation had ballooned to 15% of the pension fund, above target. While Mr. Bayne wouldn't disclose the target allocation, he said the pension fund will use the cash distributions to help it rebalance.
At the $35 billion Virginia Retirement System, Richmond, venture cap also has been a success.
"We have tried to increase commitments and have also had phenomenal returns," said Larry Kicher, managing director in charge of alternatives. As of Sept. 30, 1998, the system had $421 million in venture cap, which rose 72% to $723 million by Sept. 30, 1999.
"The venture funds have done extremely well, because most of the funds we're in are Internet oriented," Mr. Kicher said.
The system is focusing more on venture capital and less on its large buyout program, he said.
The private equity program's internal rate of return for the one-year period ended June 30 was 25.1%, exceeding the benchmark Russell 3000 index 0.2% return.
The trend was similar at the Los Angeles County Employees Retirement Association, where venture cap assets grew 49% as of Sept. 30, to $216 million, according to the fund's questionnaire.
"The market value soared because these venture cap funds took more companies public," said David Locke, senior investment officer for alternatives at the $27 billion system. "There is a huge increase in value when a company goes public. For example, a private company that is carried on the books at 24 cents a share, would be marked up to $12 a share once its goes public."
Private equity assets at the $51 billion State of Michigan Department of Treasury Bureau of Investments rose 10.5% to $4.1 billion as of Sept. 30 and had reached $4.7 billion by Nov. 30, said Bridget Medina, a spokeswoman at the system. The increase was due to market appreciation and the fact that commitments were drawn down faster than last year. At the end of November, the system increased its private equity allocation to 10.8% from 8%, and its target is now 12.5%.
Venture cap assets at the system rose 65% during the 12 months, to $604 million as of Sept. 30, because of the large number of Internet companies in the venture funds that did IPOs.
At the California State Teachers' Retirement System, Sacramento, by year's end alternatives jumped 45% to $3.2 billion from $2.2 billion as of Sept. 30, 1998.
Chief Investment Officer Patrick Mitchell said the $98 billion system changed its strategy in 1999. It is now taking a 10% to 15% stake in each partnership to which it commits, whereas it only took a 5% to 10% stake previously.
"We're not approving more alternative investments than we did before, but we are upping the amount in each. And it seems the partnerships are using the money faster these days. The returns have been phenomenal, up 36% for one year through Nov. 30," said Mr. Mitchell.