Oregon: New relationships likely off table next year

Jay Fewel, OPERF senior investment officer, said over-allocation and the burden of re-upping with existing GPs will leave little money for any group that doesn’t already have an established relationship with the $54.4bn pension.

The Oregon Public Employees Retirement Fund, which has watched its actual allocation to private equity surge above the upper limit of its target range, will likely forgo any new relationships with private equity firms in 2009, senior investment officer Jay Fewel told PEO.

“In 2009 it looks like it’s going to be re-ups only,” Fewel said. “Re-ups have first priority here because we have an existing relationship with [managers]. So, in a time when you have limited money in which to commit, and with quite a few re-ups coming back, they’ll have first call on the money. But that’s always been the case.”

OPERF could form new relationships next year if its existing GPs delay expected fundraisings, he said.

Like other institutional investors, OPERF has suffered from the so-called denominator effect, whereby the plummeting value of an investor’s public equity programme causes its actual private equity allocation to rise as a percentage of the fund’s overall assets under management.

In a time when you have limited money in which to commit, and with quite a few re-ups coming back, they'll have first call on the money.

Jay Fewel, OPERF

The phenomenon has been exacerbated by the unprecedented declines stock markets worldwide have experienced in September and October, as well as by diminishing distributions from private equity funds struggling to find exits.

OPERF's actual allocation to private equity jumped from 17.4 percent in August to 19.2 percent in September, and has recently surpassed the 20 percent threshold, according to Fewel. The fund’s target allocation is 16 percent, with a target range of between 12 percent and 20 percent.

Fewel said OPERF had predicted that a glut of private equity firms with which the pension has already invested would begin raising new vehicles in 2009, meaning capital available for new relationships would be sparse.

The prediction came before the pension lost roughly $10 billion in net asset value from April through September of this year.

Despite the over-allocation to the asset class in 2008, OPERF is currently considering a commitment to energy specialist First Reserve’s $12 billion fund before the end of the year. Although that commitment may close before the end of the calendar year, the pension may make the investment from its 2009 allocation.

Fewel said the practice of making investments from next year’s allocation in November and December was customary for OPERF. The pension has already invested twice before in First Reserve vehicles.

Fewel declined to disclose the amount of that commitment, which has not yet been finalised. After the First Reserve commitment, the pension will not make any more commitments from its private equity allocation for the remainder of the year.

At a meeting of its investment committee yesterday, the Oregon Investment Council, the state body which oversees OPERF as well as other Oregon public capital pools, approved a $50 million commitment to Endeavour Structured Equity and Mezzanine Fund I, a $150 million fund targeting small to middle market buyouts.

OPERF made the investment from its opportunity portfolio, which targets investments with smaller return potential than traditional private equity funds.