Bloomberg News

Pension Funds Committing to Fewer Private-Equity Firms

November 17, 2011

(Corrects title in second paragraph of story originally published Nov. 15.)

Nov. 15 (Bloomberg) -- The California State Teachers’ Retirement System, the second-largest U.S. public pension, is reducing the number of private-equity firms it invests in.

“We continue to make new commitments, but we’re highly selective,” Seth Hall, a portfolio manager at the fund, said today at the Superinvestor Conference in Paris. “Our goal is to reduce the number of names.”

Investors in private-equity funds, known as limited partners, are shrinking pledges to new funds and investing in fewer of them, partly because they haven’t received enough money back from previous pools to match commitments during the boom years. Private-equity managers are seeking to raise $711 billion globally, according to London-based researcher Preqin Ltd., even as Europe’s sovereign debt crisis and volatile stock markets have stunted deal making.

Firms closing funds in the third quarter raised 46 percent less than those in the previous quarter, according to Preqin. Meanwhile, announced private-equity transactions dropped 40 percent to $85 billion from the previous quarter, according to data compiled by Bloomberg.

Teacher Retirement System of Texas, which had about $110 billion in assets as of September, is decreasing the number of relationships it has with private-equity managers, partly because it is looking to invest more in each fund, said Allen MacDonell, senior director for private equity.

Consolidating Relationships

“We’re looking to consolidate our relationships,” MacDonell said during the same conference. “We do have currently a minimum investment size of $200 million,” he said. “We’re moving to consolidate relationships. That’s been one on the biggest changes of the last three to five years.”

MacDonell said the pension fund used to do commitments as low as 15 million euros ($20 million) prior to 2007 before changing its policy “to make deals that move the meter.” The fund’s allocation to private equity has increased to 12 percent from 7 percent, he said.

The proportion of North American public pension funds’ assets invested in private equity rose to 6.4 percent from 5.1 percent in October 2008, mostly because of a bigger decline in the value of other assets during the financial crisis, according to Preqin. Pension plans lifted their long-term target for private-equity holdings to a record 7.7 percent of assets as of December 2010 from 5.7 percent in October 2008, Preqin said.

“There’s no question that just because it’s a name in our portfolio and it comes back to market, there’s no such thing as an automatic re-up for us,” CalSTRS’s Hall said. “Even with our existing managers, the due diligence process is longer, deeper and I am sure, from the general partner’s perspective, much more painful than it even was before. But that’s the world we live in.”

--Editors: Steve Bailey, Edward Evans

To contact the reporter on this story: Anne-Sylvaine Chassany in Paris at achassany@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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