Tennessee takes a bow

The Tennessee Consolidated Retirement System, a $25 billion pension, made its first step into private equity investing with the hiring earlier this year of Lamar Villere to head up its private equity investment programme.

The pension has set a target allocation of 3 percent of the fund's total capital, or $750 million, for private equity investments, according to Eddie Hennessee, the pension's assistant treasurer. The pension has set a ceiling of 5 percent as the maximum allocation to private equity, Hennessee says.

Tennessee is in the early days of setting up its private equity programme, building up the infrastructure and setting up legal support and accounting procedures, Hennessee says. Investing in private equity funds should commence in the autumn, he says.

One goal of the programme is diversification in order to avoid several different kinds of “concentration risk”, including spreading investments across geographic areas, investing with a variety of general partners and in different vintage years and industries.

“The private equity investment programme will be structured to avoid concentration risk. The portfolio will tend to be less diversified during the growth phase than would be the case for a seasoned portfolio,” a policy document states.

As with most public pensions, Tennessee has a policy in place for public disclosure, including the name of the investment vehicle, the name of the fund manager, the title of the fund and the amount invested in the fund. Exceptions to this policy do exist, and Tennessee will keep records out of the public eye if the disclosure could have an adverse effect on the value of the investment.

Tennessee plans to work with a private equity adviser on sourcing and selecting funds and negotiating with managers. The pension will focus on domestic and international venture capital, buyout, mezzanine, distressed debt, special situations, secondary opportunities and co-investments. Investment vehicles could include limited partnerships, private placements, co-investments, funds of funds and commingled funds, the document states.

While private equity will be a new field for the pension, Tennessee has been investing in real estate for 10 years, Hennessee says.

HOW TENNESSEE'S PENSION INVESTMENT IS SPREAD

The chief investment officer is permitted to make investments within the following ranges:
Asset Class Minimum Maximum
Domestic Stocks 25% 50%
Domestic Bonds 20% 60%
Inflation Indexed Bonds 0% 15%
Short-term Securities 0% 10%
International Bonds 0% 10%
International Stocks 5% 25%
Private Equity 0% 5%
Real Estate 0% 10%