Tennessee enters private equity with $900m initiative

The move by the $32bn pension fund investor highlights increasing interest in private equity allocation among publicly managed US state retirement funds.

The Tennessee Consolidated Retirement System (TCRS) has received state governmental approval to invest up to 3 percent of its $32 billion (€22 billion) in pension fund assets into private equity funds. The pension fund will target an investment of $900 million and will also look to hire a director of private equity investment in the near future.

The TCRS’ new investing ability, which was granted via changes in state law that took effect two months ago, will enable it to commit to a broad array of private equity investments, including venture capital, corporate buyouts, mezzanine and distressed debt, special situations and secondary funds.

However, Ed Hennessee, the state’s assistant treasurer for employee benefits and investments, warned that the retirement system’s final private equity investment policy could end up considerably narrowing this broad investment scope. He cautioned that the state has not begun to craft the policy because it has not yet hired a director for private equity investment or a consultant to help it develop such a policy.

Hennessee hopes to accomplish both and get a policy to the TCRS Council on Pensions and Insurance before it holds its next scheduled policy meeting at the end of next month, though “it would be presumptuous to assume that they will approve it at their first look”. With this in mind, he estimated that it could be a year before the TCRS pensioners see any money begin to flow to private equity.

Still, Hennessee held out the prospect of investing in private equity as an attractive part of a diversification strategy recommended to the TCRS by its investment consultant, San Francisco-based Strategic Investment Solutions (SIS).

“[SIS] indicated that it was another asset to diversify into, that it had higher projected returns than many of our existing assets and would provide lower volatility in our asset mix,” Hennessee said.

The TCRS is not alone in following such a diversification strategy. In July 2007, the Arizona State Retirement System launched a private equity programme which incorporates 5 percent of it $28.5 billion trust fund to the asset class. And the Employees Retirement System of Texas has launched a 2008 fiscal year private equity programme for its $24.3 billion trust fund, which targets an 8 percent allocation to the asset class.

Recent months have also seen a number of increases in target allocations to private equity among pension plans. The New Mexico Educational Retirement Board increased its target allocation from 5 percent to 10 percent; the Washington State Investment Board increased its target allocation from 17 percent to 25 percent; and the California Public Employees’ Retirement System increased its target allocation from 6 percent to 10 percent.

However, Hennessee cautioned that before the TCRS could follow in the footsteps of New Mexico, Washington or California, the state would have to receive legislative approval to raise the fund’s maximum private equity allocation above 3 percent.