Oregon focuses on long-term pacing plan to reduce overallocation to PE

Oregon’s private equity portfolio serves as a case study for the denominator effect’s impact.

Oregon Investment Council remains heavily overallocated to private equity and will rely on its long-term pacing plan to bring the asset class closer to its target.

The $93 billion Oregon system ranks near the top of the list of institutional investors impacted by the denominator effect, which has driven up allocations to private equity to exceed target ranges. One of the largest LPs in the country, Oregon’s private equity portfolio has consistently stood well above its target, leading to questions about possible rebalancing measures.

Oregon’s private equity portfolio and possible rebalancing measures were discussed at it  board meeting on Wednesday.

According to board documents, the system allocates 27.8 percent of its total fund to private equity, above its 20 percent target and just above the upper band of its allowed range. Private equity has the largest actual allocation to the total fund compared to its other asset classes.

However, public equity has the highest target allocation at 27.5 percent. Public equity currently comprises 20.5 percent of Oregon’s total fund, board documents said.

The allocation mix played a key role in the system’s total fund generating a 3.2 percent return on an annual basis, below its benchmark of 3.7 percent.

Public markets have rallied this year, which contributed to the system’s below overall benchmark returns due to its underallocation. The system’s private equity returns fell by 1.8 percent on a year-to-year basis, according to a presentation from Meketa, Oregon’s consultant.

“Private equity has been a particular headwind to the benchmark,” said Paola Nealon, a managing principal at Meketa.

Carla Samples, who chairs the investment committee, said the system should take steps to work towards its target allocations.

“If we were at our targets, we would not be talking about public equities being a drag on the portfolio because they are so underweight. If we were closer to alignment, that would be significantly helpful,” Samples said.

Oregon chief investment officer Rex King said the system needs to focus on a long-term approach to rebalance the portfolio.

“We are pretty illiquid. Our pacing plan is intended to get us to our targets within five-to-seven years. Any choices we make today, like looking to secondaries, can be quite costly,” King said.

Oregon approved a pacing plan between $2.5 billion and $3.5 billion in new commitments to private equity for 2023 at its January board meeting.

Board members have jockeyed with staff regarding its allocations to private equity in recent months.

In December, the board went against a recommendation from Meketa to hike its private equity target to 22.5 percent, instead deciding to keep it at the current 20 percent.