Pension vs. pension

The divergent directions of two US public pensions show that the fundraising environment in the US may not be as dead as some GPs think.

A look at the different tracks taken by two US public pensions over the last year show the widely divergent fates of institutions investing in private equity. It also offers hope that GPs can still find money in the US, despite some institutions pulling back from the asset class.

Tightening access

The Pennsylvania State Employees’ Retirement System, with about $24 billion in assets, has been a significant private equity investor since 1985. Its private equity portfolio is valued at $5.7 billion.

Since the financial downturn, the pension severely exceeded its 12 percent allocation cap to private equity. Caused in part by the falling value of the rest of its investment portfolio, the pension’s actual allocation to the asset class stands at about 23 percent.

Among the steps taken to assuage the problem, the pension made zero commitments to private equity funds until the latter half of 2009, when it invested $250 million in Sankaty Middle Market Opportunities Fund, a credit-focused affiliate of Bain Capital.

PA SERS expects to make very few commitments to private equity this year, but did earmark $25 million for Oaktree Power Opportunities Fund III in January, its first commitment of the year. The commitment was not only a re-up, as the pension had committed $25 million to the previous OCM/GFI Power Opportunities Fund II, which raised $1 billion in 2005, but a continuance of a core relationship for the pension. PA SERS has committed $450 million to 12 funds sponsored by Oaktree since 1996.

Opening the gates

While PA SERS stays defensive, not looking for new relationships, another US public pension, the Maryland Retirement System, is looking to forge many new relationships with private equity managers.

“I’m hoping that we’ve earned a lot of GP respect, or at least it’s recognis   ed that we’re committed to the asset class,” Mansco Perry, the pension’s chief investor officer, told PEI in a prior interview.

The $30 billion pension has a target allocation of 12 percent, and an actual allocation of 3.7 percent. Maryland ended 2009 by making $1 billion-worth of commitments to private equity, investing in firms like Oaktree and White Deer Energy, the debut fund of former First Reserve president Ben Guill. The pension has also heavily targeted debt funds, committing to LBC Credit Partners, Park Square Capital and Merit Capital Partners mezzanine funds.

The pension’s private equity programme has a market value of $3.8 billion, with commitments to 84 funds. In 2009, Maryland invested a total of about $2 billion in 28 funds.

Keeping perspective

A perception exists that the US, and other more traditional sources of capital, are not going to provide the money needed to help firms raise new funds.  While some US pensions find themselves in similar predicaments to Pennsylvania, including the Pennsylvania Public School Employees’ Retirement System, other public programmes, like the Tennessee Consolidated Retirement System, are young and looking to fill out the fresh allocations in their portfolio.

That should offer some hope to general partners anxious to raise money in a slowly improving, but still slow, fundraising environment.