New Jersey increases breathing room for private equity

The pension plan fast-tracked adoption of an ‘allowable allocation’ of up to 15% to allow for flexibility in times of volatility.

The New Jersey Division of Investment has fast-tracked the adoption of an allowable allocation to private equity of up to 15 percent to take into account the fluctuating value of the portfolio in the face of public markets volatility.

The pension plan increased its target private equity allocation from 10.25 percent to 12 percent, effective 1 October, as reported by Private Equity International. When that change was approved, the council also recognised the need to update its regulations to increase the allowable allocation from 12 percent to 15 percent “to accommodate the higher targeted allocation and to allow for appropriate flexibility in an environment like today characterised by abrupt capital market price changes,” division of investment director Corey Amon said at a state investment council meeting on Wednesday, which was held via telephone.

The updated regulation was approved in November but is not yet in effect due to “an unanticipated delay in adoption”.

The fast-tracked action is particularly pertinent as the private equity allocation was measured to represent 12.8 percent of the pension fund as of 20 March.

Amon said that while it’s clear we are in the middle of a near-term public health crisis that is “central to financial market turmoil”, it is important to evaluate how decisions made today will impact the pension fund in five and 10 years from now.

“Investments in private equity are long term in nature. That means the decisions we make today will impact the structure of the pension fund portfolio in 2025 and 2030,” he said.

“To be clear, the division fully recognizes the need to remain vigilant in the midst of near-term market uncertainty… The division also believes that the best long-term outcomes result from maintaining a disciplined investment approach. This discipline includes a consistent approach to capital commitments in the private markets.”

Amon said that, with the benefit of hindsight, the division can see the pension fund “missed out on strong returns by not maintaining a consistent approach to pacing in 2008 through 2010” and therefore lacked the vintage year diversification that would likely have enhanced returns in more recent years.

Investment consultant TorreyCove Capital Partners presented its recommendations on commitment pacing, advising the pension plan to commit $1.1 billion in 2020 and between $1.1 billion and $1.2 billion annually through 2025 to private equity.

Asked by a council member whether there was any scenario in which the pension plan should “drastically reduce” or even stop making new commitments to private equity, TorreyCove managing director Michelle Davidson stressed the need for vintage year diversification and pointed out that, were the pension to stop new investment activity, in a few years distributions would dry up.

During the meeting the pension approved a $100 million commitment to CVC Capital Partners VIII, which has a target of €17.5 billion and is “seeking to raise roughly €20 billion”, Robert Colton, an investment analyst at the division of investment, told council members.

In response to an earlier council member’s concern about paying management fees on committed capital when private equity firms may not be in a position to deploy that capital quickly, Jared Speicher, head of private equity, private credit and co-investment, said the division is not expecting Fund VIII to call any capital until 2021 and the fund will not be activated and begin charging fees until the first investment is made. The vehicle has a six-year investment period.

In recommending the investment, Davidson said TorreyCove considers CVC to be “one of the highest quality groups in Europe and essentially a pair of steady hands to weather through this cycle.”

“They’ve been through multiple economic cycles and performed quite well overall.”