Executives overseeing alternative investments at large pension funds made a concerted effort last year to increase their venture capital commitments, and it paid off, boosting overall returns and portfolio size.
For the year ended Sept. 30, the nation's 200 largest pension funds reported venture capital investments of $34 billion, up a hefty 94% from $17.6 billion a year earlier, according to data from the Pensions & Investments 2000 survey of the largest U.S. pension funds. This was the largest increase among alternative classes tracked by the P&I survey. The others are: private equity, up 63% to $79.7 billion; real estate investment trusts, up 48% to $13.8 billion; real estate equity, displaying more strength than in recent years, up 11.9% to $93.3 billion; oil and gas up 6.3% to $1.67 billion; and private debt up 16.7% to $4.88 billion. Distressed debt, which had been the high-flyer among alternatives in 1999 with one-year growth of 166%, was 2000's loser. Pension funds dumped those investments, causing assets to slide 11% to $1.6 billion.
The $170 billion California Public Employees' Retirement System, Sacramento, topped the list for the most assets in both private equity and real estate equity in 2000. Fund spokesman Brad Pacheco said the increase in real estate equity was due to several large acquisitions, including an $800 million purchase of Washington Realty Trust, as well as the purchase of a $929 million industrial portfolio from Pacific Gulf Properties through CalWest, the system's joint venture with RREEF Funds, Chicago. "We were acquiring at a good pace," he said. The system's total allocation to equity real estate and REITs is 8%.
REITs up 50% at CalPERS
REIT investments at CalPERS grew to $900 million in 2000 from $600 million a year earlier. "Our advisers were in an acquisition mode to pursue opportunities they saw. Those included new allocations in June of $100 million to the apartment sector and $50 million to the industrial sector," Mr. Pacheco said.
And CalPERS' total private equity portfolio grew to $7.5 billion, up 32% from $5.7 billion in 1999. Much of the growth came from three $500 million funds started by the system: the California Biotechnology fund; the California Initiative; and a Corporate Partners program. The target for private equity is 6% of total assets, including venture capital. Venture cap rose to $1.5 billion from $1 billion in the period, most of it coming from a new allocation of $400 million to Grove Street Advisors, Boston, which now manages around $700 million in a proprietary fund of funds program for the system.
SBC Communications, Inc., San Antonio, Texas, with $45 billion in defined benefit assets, posted significant year-over-year increases in both real estate investment trusts and venture capital as a result of its merger with Ameritech Corp., Chicago, said Roger Wohlert, chief investment officer. SBC jumped to second on this year's REIT list, with $1.07 billion, after not being on it previously. "Most of the REIT assets came from Ameritech," Mr. Wohlert said. "We didn't have enough at SBC to break it out separately before." And SBC's venture cap portfolios practically quadrupled, putting it at the head of that listing, with its rise to $2.6 billion in 2000 from $653 million in 1999. "Around $1.4 billion of that was from Ameritech; the rest was from performance," Mr. Wohlert explained.
Several pension fund executives emphasized that they beefed up their venture cap commitments last year.
At the $50.7 billion State of Michigan Department of Treasury Bureau of Investments, Lansing, total assets in private equity nearly doubled to $8.18 billion from $4.73 billion the year before, said Alan van Noord, director of investments.
"Most of the increase came from venture cap," added Dave Turner, administrator alternative investments. Venture cap more than doubled to $1.5 billion from $604 million in the one-year period. "It was a combination of new commitments and increased market value of companies in the portfolio that did not go public. In addition, we upped our allocation to venture cap from 8% of alternatives to 18% of alternatives. And we raised the total allocation for alternatives to 15% from 9%." Mr. Turner said he will continue looking at new opportunities, but because the system is so near its allocation cap, it will be more selective.
Mr. Turner and others also observed that buyout and venture capital fund managers have been re-upping - coming back to their limited partners to raise money for new funds - sooner than ever, which also has affected allocations.
"Last year it went from a four-year cycle to an 18-month cycle," said Dan Smith, director of investments at the $40 billion Oregon Public Employees Retirement Fund, Salem. The fund added $1.2 billion in new private equity commitments across the board in 2000. The allocation target is 10%, but in percentage terms, the fund has gone over that because of the weak public markets.
BellSouth Corp., Atlanta, with $20 billion in pension defined benefit assets, also highlighted venture cap last year, increasing it by $210 million to $521 million, said Al Gasiorek, executive director trust investments. "We were light (on venture cap) and made a real effort to include it in private equity." The pension fund's total private equity assets rose to $1.81 billion from $838 million. "A lot of money was drawn down last year at a faster pace than previously, and a lot of re-ups were hitting us last year. We added new groups, but we won't be making as many commitments (this year) as last year. We don't want two big years in a row and expect to be more selective," said Mr. Gasiorek. He said for the last 18 months, the fund has maintained a 10% allocation to private equity.
Many of the funds have been rebalancing to increase their private market investments.
At the $90 billion New York State Teachers' Retirement System, Albany, real estate equity assets grew 19% to $3.53 billion for the year ended Sept. 30, as the system implemented a strategic plan to increase its allocation, said spokeswoman Candice Ronesi. "The target allocation is 6%, and we were at 5% as of Sept. 30." The system has been cutting back its domestic equity portfolio, selling $200 million a month and putting the proceeds into real estate and other private investments, she noted.
The $120 million New York State Common Retirement Fund also has been shifting money into private equity from domestic equities, said Jeffrey Gordon, a spokesman for the Albany-based system, who said the private equity allocation grew to 4.8% of investments in 2000, up from 3% of investments in 1999. The private equity assets gained 66%, rising to $6.3 billion in 2000 from $3.8 billion in 1999.
John Alouf, investment officer at the $38.6 billion Virginia Retirement System, Richmond, said private equity assets generated an internal rate of return of 148% for the year ended June 30, the most recent numbers available. The system's venture cap assets rose to $1.77 billion from $723 million, while other private equity jumped to $2 billion from $1.25 billion, as of June 30.