LP Radar: Core Strength

The Oregon Investment Council (OIC) may be headquartered in the small town of Tigard, Oregon, outside of free-spirited Portland, but the location shouldn't belie the serious clout the OIC carries with North America's largest GPs. As manager of investment activities for the $71 billion Oregon Public Employees Retirement Fund (OPERF), OIC officials manage OPERF's private equity portfolio.

MEGA DIVERSIFICATION

In April, OPERF reaffirmed its interest in the large cap buyout segment, an area where its interest in the asset class took root more than three decades ago. Since then, the OIC has committed capital to major large cap funds managed by TPG Capital, J.C. Flowers & Co., and Apollo Global Management, among others.

While some pensions are looking to increase their exposure to small-cap funds, Oregon isn't backing away from mega funds. When OIC officials held their 2015 private equity planning session earlier this year, one objective the staff established was to diversify the system's exposure to large buyouts through identical sized commitments to four or five “core” fund managers, according to its March meeting minutes.

Kelly DePonte, a managing director and longtime placement agent for Probitas Partners, explains Oregon's focus makes sense because it allows the pension plan to deploy bigger chunks of capital, adding that by doing so the OIC gains “economies of scale”. Smaller commitments require the same amount of work as managing larger amounts of capital, he notes. 

DePonte says some large financial sponsors like Blackstone are also offering attractive terms on their newer funds, further incentivizing limited partners to “re-up” their commitments with existing GPs overseeing large funds.

OPERF has an overall 20 percent allocation to private equity, and 10 percent allocation to alternatives, according to OIC documentation. 
In 2014, the system authorised $2.9 billion in commitments to private equity as compared with $1.8 billion in 2013, according to OPERF. Last year's commitments were spread between multiple investment strategies, and the OIC added some new manager relationships. OPERF's private equity program has outperformed the Cambridge Associates median IRR benchmark in 21 of the past 28 vintage years, according to OPERF. 

It would be remiss, though, to discuss the OIC's interest in large cap fund managers without mentioning the pension plan's senior investment executive behind much of its large cap commitments from the late 1980s until his retirement last year: Jay Fewel. 
OPERF's dedication to large cap buyout partnerships was reconfirmed in a more concrete fashion in April when senior OIC officials – chair Kathy

Durant, CIO John Skjervem, investment officer Sam Green and state treasurer Ted Wheeler – gathered with other staffers to listen to a presentation by one the world's largest financial sponsors: the Blackstone Group and its COO Tony James.

James, also president of Blackstone, outlined the value proposition for supporting its seventh global private equity fund, a $17 billion vehicle that when closed will be just a few billion dollars shy of the firm's $21.7 billion fifth fund. OPERF advisor Torrey Cove Capital Partners recommended that the Oregon pension system commit $500 million to Blackstone Capital Partners VII. 

“Blackstone represents an attractive opportunity to continue investing with an existing, high performance partner, and represents a core large corporate finance relationship within the OPERF private equity portfolio,” according to its April meeting minutes.

Blackstone's seventh fund isn't focused solely on large cap buyouts, or what the firm defines as deals valued at $4 billion or more in enterprise value. It will seek to deploy capital in 25 to 40 investments spanning a wide range of transaction types including mid-cap buyouts, sub-$4 billion transactions, growth equity and “development projects” (significant minority investments in mature companies and greenfield energy projects), according to the OIC's April meeting summary.

OPERF's commitments to private equity totals more than $35 billion to the asset class since the 1980s, resulting in an internal rate of return of 15.8 percent through September 2014, according to state pension portfolio documents.

LARGE CAP ROOTS

The Oregon pension and Blackstone share an interesting legacy in private equity that stretches back to the 1980s. The latter launched its private equity business in New York four years after the retirement system made its first commitment to another mega fund manager: KKR. 
OPERF's relationship with Blackstone began a couple decades later. In 2011, Oregon committed $200 million to Blackstone's sixth buyout fund and three years later $200 million to its second energy fund. 

Based on data from the OIC's April meeting, it's not hard to see why Oregon is interested in Blackstone's seventh fund. After all, Blackstone Capital Partners' buyout vehicles have generated a net internal rate of return of 16.4 percent and net value multiple of 1.7 times through December 2014 (cumulative gross IRR totals 27.8 percent). Over the last two years, Blackstone has returned more than $25 billion from 38 exits to its investors.

While the large amount of capital distributed by Blackstone is attractive and its track record impressive, news of OPERF's latest commitment to the firm should be viewed as encouraging to other large cap managers seeking capital. After all, one of the seminal heavyweights in the US institutional investor community has set the stage for further commitments to large cap funds.