Oregon pension: cross-fund investments are ‘highly conflicted’

Industry trends such as GPs making pre-emptive bids and the rise of cross-fund investments are signals of late cycle behaviour, according to the $101bn Oregon State Treasury.

Oregon State Treasury, which manages about $100.7 billion in assets across several pension funds including Oregon Public Employees Retirement Fund, has weighed in on industry themes such as cross-fund investments, quick fundraises and pre-emptive bids.

In its Private Equity Annual Review and 2019 Plan, the pension manager expressed concern about firms making investments in existing portfolio companies from separate funds, and highlighted that fast fundraising is limiting investors’ negotiating power.

Cross-fund investing: “Highly complex and conflicted” is how the pension described the strategy, which saw a rise last year. Cross-fund investments are generally disliked by LPs as such deals could give rise to potential conflicts of interest among the firm’s investors.

OPERF noted that the trend suggests GPs may be struggling to find opportunities “that make sense on a standalone basis and at prevailing market prices”.

Fast fundraising and deployment: This is making pacing and pipeline management more challenging for LPs, OPERF said. GPs returning to market quicker and pursuing a two to three-year deployment place versus the conventional three to four-year pace means the fundraising environment will become even more competitive for quality allocations, resulting in constrained bargaining power for LPs.

The new “P” word: With so much capital chasing deals, pre-emptive bids – where a private equity firm positions itself as the winning bidder before other bidders even submit their bids – have become the new proprietary deals in the industry and GPs are boasting about these to win transactions and pre-empt auction processes. The strategy may face challenges as firms increasingly pursue the same plan of action, Oregon noted.

Buyouts: Oregon will continue a North American buyout-heavy strategy due to the size of its portfolio. About 78 percent of its portfolio is invested in buyouts, 10 percent in special situations and 12 percent in growth equity and venture capital. Over time, the pension manager expects its venture capital exposure to come down, while special situations will be looked at more opportunistically.

Last year the investor made a total of $2.98 billion of commitments in buyout funds including Bridgepoint Europe VI (€281 million), Hellman & Friedman Capital Partners IX ($280 million) and Vista Equity Partners VII ($500 million).

Asia: Over the long-term, the pension fund will increase its exposure in this region at the expense of developed markets, although for capacity reasons OPERF’s allocation “can only move as fast as the broader industry develops in emerging markets”. The region made up about 11 percent of its geographic exposure as of end-June, against a target exposure of between 10 percent and 15 percent. It has backed ClearVue Partners’ third China consumer-focused fund, Orchid Asia’s seventh vehicle and KKR’s third flagship Asian fund, according to PEI data.

The pension manager expects to make 15 investments of about $100 million to $500 million each over the course of the year as part of the the $75 billion OPERF which it manages, according to 31 January investment committee meeting documents.

OPERF’s plans for its private equity programme also include recruiting a third investment officer to “further leverage the alternative programme’s analyst resources”; enhancing data capture and monitoring; continuing to exploit structured discount opportunities to reduce fee drag and re-launching a revised co-investment programme.