US pensions: LPs take different approaches to reduce their private equity exposure

US public pension funds such as Employees Retirement System of Texas and State of Wisconsin Investment Board are looking to slow their investment pace.

US public pensions have had to make tough decisions over the past year, balancing the need to reduce their allocations to PE with the desire to carry on investing in one of the best-performing asset classes. While many are experiencing the same problem, there is proving to be a range of potential solutions.

Private Equity International recently reported that Employees Retirement System of Texas is looking to slow its private equity investment pace. The public pension, which has $6.55 billion in PE assets under management, upped its target allocation from 13 percent to 16 percent at a board meeting so as to “reduce the need to drastically scale back” a strongly performing programme.

State of Wisconsin Investment Board has taken a similar stance, increasing the range around its allocation towards private debt and private equity to 5 percent in either direction to prevent it from having to sell public equities to balance the portfolio. Before the revision to its investment policy, if its allocation to PE was 3 percentage points out, it would trigger a mandatory sell-off.  

Others are keeping their allocations firm but slowing their investment pacing. In June, PEI reported that New Mexico State Investment Council had to downsize its commitment to TDR Capital’s latest fund despite the “great job” the GP has done. NMSIC’s board approved a commitment of €50 million to in-market TDR V, compared with €65 million to the 2017-vintage Fund IV and €55 million to the 2014-vintage Fund III.

“The successful managers in our programme have a burden from a portfolio diversification perspective,” said NMSIC director of private equity David Lee. “You have an outsized NAV for the size of your previous allocation and that ends up being an outsized portion of the portfolio.”

Taking action

Then there are pensions such as Oregon Public Employees Retirement Fund, managed by Oregon State Treasury, which initially took the approach of doing nothing. Despite its PE portfolio being more than six percentage points overallocated as of June, the pension was banking on its PE portfolio naturally shrinking back within its allocation limits in line with the continued economic downturn.

“We should expect those [PE allocation] numbers to come down in the second quarter given the difference in the market environment,” said Paola Nealon, a principal at consultancy Meketa, at the pension’s June board meeting. 

Oregon PERS’s private equity allocation still stood at more than 27 percent at the end of the second quarter, however, making it the $94 billion fund’s largest asset class. In the pension’s September board meeting, there was a noticeable U-turn, with Meketa noting the
fund was undertaking actions to reduce its allocation to private equity. No details were provided about what these efforts entailed, but clearly, doing nothing is no longer an option.