Funds boost private equity investing by 38%

Pension fund investments in private equity increased 38% to $269.8 billion, resulting in the sector accounting for about 7% of total defined benefit assets among the top 200 U.S. retirement funds in the 12 months ended Sept. 30.

According to data gathered for Pensions & Investments' annual survey of the nation's largest plan sponsors, buyout investments reported by defined benefit funds increased 26% to $149.2 billion, while venture capital grew 16.4% to $27.7 billion.

Once again this year, the California Public Employees' Retirement System, Sacramento, retained its top spot on P&I's list of the largest U.S. institutional investors in private equity. CalPERS' private equity assets grew by a third, to $29.88 billion from the year-earlier period. California State Teachers' Retirement System, West Sacramento, held onto second with private equity assets up 28% to $19.9 billion; New York State Common Retirement Fund, Albany, was third again, up 23.8% to $13.8 billion; and Oregon Public Employees Retirement Fund, Salem, retained fourth place with private equity assets growing 27% to $11.3 billion.

The increase is partly due to a trend in which institutional investors are paying out more in contributions in the form of capital calls to private equity funds than they get back in distributions, which are the investors' share of the profits.

“Institutional investors, in general, have experienced a decline in net cash flow into private equity programs,” according to Pension Consulting Alliance Inc. in a private equity performance report for CalPERS for the year ended Sept. 30.

“We are attributing the increase in private equity to the increase in valuations,” said Karen M. Harris, consultant in the capital markets research group, Callan Associates Inc., San Francisco.

CalPERS' private equity portfolio earned 21.5% for the year ended Sept. 30, compared with the 13.1% return of its benchmark, Wilshire 2500 index without tobacco plus 3%. By comparison, CalPERS' global stock portfolio returned 9.9% and global fixed income earned 15.5% for the year ended Sept. 30, according to CalPERS' total fund review for the period.

“We are still bullish on private equity,” said spokesman Clark McKinley. “We did not change our (target) asset allocation. It's still 14%, plus or minus 5% discretion.” CalPERS' actual private equity allocation was 13.9% as of Sept. 30.

Some investors are finding that they are now above their target private equity allocations. For example, the Oregon Public Employees fund was above its 12.6% target allocation — at 21%— because of the double-digit returns, said James Sinks, spokesman for the Oregon Investment Council, Tigard, which oversees the employees fund.

Much of Oregon's private equity increase was due to its buyout portfolio, the assets of which increased 30% to $8.61 billion in the 12 months ended Sept. 30. Oregon's venture capital portfolio increased 51.5% to $453 million.

Private equity was not the only alternatives asset class to show an increase in assets during the period.

Two asset classes, energy and infrastructure, while representing relatively small portions of the top 200 pension fund portfolios showed rapid increases in assets during the survey period. Energy went up 188% to $5.7 billion, commodities grew by 97% to $18.3 billion and infrastructure is up 76% to $5.1 billion.

Teacher Retirement System of Texas, Austin, ranked first in both largest commodities portfolios and infrastructure portfolios among P&I's top 200 pension funds. Texas Teachers' infrastructure portfolio was up 59% to $997 million, while its commodities portfolio grew 14% to $2.25 billion.

During the survey period, Texas Teachers' made commitments to the Zachry Hastings Infrastructure, First Reserve Energy and Alterna Core Capital Asset funds.

CalPERS, which reported the third-largest infrastructure portfolio among the top 200 pension funds, increased its infrastructure assets to $435 million largely due to investing up to £106 million ($157 million) in June to acquire a 12.7% equity stake in London's Gatwick Airport from Global Infrastructure Partners, Mr. McKinley noted.

The increase in commodities among the largest U.S. pension funds was helped by a boost in returns, especially over the summer. Commodities also increased as institutional investors began ramping up their real asset allocations.

At Texas Teachers, part of the increase in its commodities portfolio was from its gold investments. On Oct. 1, system officials invested $250 million in an internally managed gold fund — the Global Best Ideas Gold Fund.

Many institutional investors added real assets as an inflation hedge, industry insiders said.

“We had a number of clients add commodities because of their real asset allocations,” Callan's Ms. Harris said.

Recently, they began adding real assets, which includes physical assets like real estate, infrastructure, timberland, agriculture and private energy. Real assets also includes financial assets such as TIPS and commodities, Ms. Harris explained.

Most of Callan's U.S. pension fund clients already invest in real estate equity, she said.

Indeed, this year's survey reveals that real estate equity assets of the top 200 U.S. pension funds grew by 16% to $167.7 billion. Real estate investment trusts were up 30% to $22.5 billion.

By comparison, the NCREIF Property Index return was 5.8% for the year ended Sept. 30 and the FTSE NAREIT All REIT index return was 28.27%.