Strategic shift

Why one of the largest pensions in the US is hunting for opportunities in the secondaries and distressed markets. By ChristopherWitkowsky

New Jersey's State Investment Council, which manages the state's $63 billion pension, has followed many other US pensions by opting to slow its investments in new private equity and real estate funds. But far from abandoning these asset classes, New Jersey has switched its attention to secondaries and distressed opportunities.

The pension is striving for ways of mitigating the fallout from the collapse of financial markets last year. New Jersey's pension started 2008 with a value of about $80 billion, which today stands at about $17 billion less.

New Jersey's move comes only a few years after it began investing in alternatives.

“Our belief is that institutional investors with large allocations to alternatives (i.e., endowments, foundations, pension funds) will be forced to sell portions of their portfolios in order to raise liquidity and to rebalance their overall asset allocation,” according to William Clark, director of the council, in a memo.

New Jersey started investing in alternatives in 2005 as a way to diversify its portfolio and make up for losses it sustained after the dotcom bubble crashed in 2001. In 2001 and 2002, the pension's returns lingered around the 10 percent level.

For its initial foray into private equity, New Jersey chose to invest with some of the biggest players in the game. It made a $100 million commitment to the $10 billion Apollo VI; $200 million to the $8.5 billion Goldman Sachs Private Equity Partners; and $100 million to the $11 billion Blackstone V.

Within the underlying portfolios lurk some problem investments. Apollo VI has stakes in casino operator Harrah's and real estate firm Realogy, both of which held exchange offers last year to reduce debt. Also, Apollo's intended buyout of chemicals company Huntsman Corporation was abandoned because of market conditions. The collapse of the deal resulted in a $1 billion break-up fee, with $225 million of that coming from funds V and VI.

NEW JERSEY'S PRIVATE EQUITY PORTFOLIO

Commitments Actual Total
Through Commitments Commitments
6/30/07 ($m) FY08 ($m) ($m) Percent
Large buyout 1,076 900 1,576 23.20%
Domestic mid-mkt buyout 970 650 1,770 26.06%
Domestic small mkt buyout 325 152 525 7.73%
Int'l buyout 567 462 717 10.55%
Emerging managers 100 108 200 2.94%
Venture 150 41 300 4.42%
Distressed 520 400 820 12.07%
Mezzanine 285 175 435 6.40%
Co-Investments 100 57 200 4.42%
Secondaries 101 0 150 2.21%
Total 4,194 2,945 6,793 100%