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Private Equity

Many innovating, but not all moving to direct route

John D. Skjervem said the Oregon fund prefers to work with a smaller number of managers.

A number of asset owners are tweaking their private equity investment strategies in hopes of eking out the most possible returns but keeping risks under control.

And not all asset owners are moving toward direct investing.

Officials at one of the pension plans with the most mature private equity portfolios in the world, the Oregon Investment Council, which runs the $74.5 billion Oregon Public Employees Retirement Fund, Tigard, "is sticking to its knitting" and investing in commingled funds, said John D. Skjervem, chief investment officer for the Oregon State Treasury. The pension plan has invested in private equity since 1981.

Unlike other asset owners, Oregon has been slowly cutting its private equity target allocation. Oregon is on pace to bring down its private equity portfolio to the lower end of its target allocation of 17.5%, plus or minus 4 percentage points. Currently, 21.3% of its portfolio is invested in private equity. When Mr. Skjervem joined the Oregon State Treasury in 2012, the pension plan had a 25% private equity target allocation. In 2012, Oregon had 100 active private equity general partners, which is now down to about 40.

The reason is a combination of Oregon's objectives and its three-person private equity team, he said.

"We want to be to be a more important LP to fewer GPs," he said. "That has been successful. With a staff of three and a (smaller) general partner roster, we can put $3 billion (annually) to work."

Mr. Skjervem noted a lot of "experimentation and innovation" among Oregon's peers, but Oregon is not participating in that.

"We are on the sidelines watching keenly," he said. But the fund model is best with a lean staff, he said.

In late 2018, officials instituted a "systematic co-investment program" in which staff co-invests in every deal its GPs invests in on a pro rata basis matching the percentage of the fund represented by Oregon's commitment. A systematic model avoids the need for staff to pick and choose transactions and the issue of adverse selection, he said.

As more funds look to do direct and co-investing, the question is whether asset owners' staffs have the deal selection skill set, he said.

"Some peers have said, 'yes,'" Mr. Skjervem said. "In the fullness of time, we will see if that is successful."

The $44 billion University of Texas/Texas A&M Investment Management Co., Austin, is also moving toward increasing co-investments in its private assets portfolios, according to its list of investment priorities in its Feb. 28, 2018 board book. Also, in 2018, UTIMCO increased its private equity target allocation to 25% from 17.5%.

This year, the University of Texas announced plans to set up strategic partnerships with between two and four alternative investment firms managing private equity, real estate, natural resources and credit strategies. Private market managers will be given between $1 billion and $2 billion each for investments in funds and co-investments.

Jonathan Grabel, CIO of the $55.8 billion Los Angeles County Employees Retirement Association, Pasadena, Calif., said that in private equity it is important to first decide why the asset owner is investing in a particular strategy before getting to how to implement the strategy.

"We look at the context or fit of a PE investment relative to adjacent or substitute strategies," Mr. Grabel said. "If you maintain a rigid private equity program that is defined solely for the sake of its implementation model, the resulting portfolio may be less strategic."

LACERA is modifying the direction of its private equity portfolio. Officials recently changed its private equity benchmark to a global public equity benchmark plus 200 basis points from a U.S. benchmark to help identify global opportunities.

LACERA is also investing with newer and smaller firms to build relationships with general partners "who may have better goal congruence with LACERA," Mr. Grabel said.

LACERA officials also just completed "a significant" sale of private equity limited partnerships on the secondary markets. He declined to provide specifics but said that the sale was at full value and/or represented overconcentrations to geographies, sectors or styles.

"What remains is a high-conviction portfolio," Mr. Grabel said.

What's more, fee efficiency remains a priority, he said.

To reduce fees, LACERA officials are making larger and earlier commitments in funds along with co-investments.

"Yet the focus on the why of our private equity program has the potential to yield an order of magnitude reduction in fees," Mr. Grabel said. "Fundamentally, if we avoid paying private equity fees for exposures that are readily available in the public markets, we can reduce expenses and best position the fund for our members."