by David G. Barry
The Oregon Public Employees Retirement Fund (PERF) recently hit a significant milestone, with its actual allocation to private equity exceeding its actual allocation to public equities. In a report released for its March 28 board meeting, the $95 billion PERF said that as of February, it had allocated 27% of its fund, or $25.7 billion, to private equity, and 25.2%, or $24 billion, to public equities.
In contrast, in 2008, at the onset of the Great Financial Crisis, Oregon had 15%, or $9 billion, of its funds in private equity. Public equities, meanwhile, accounted for a total of 47%, or $29 billion. In total, Oregon had 62% of its dollars allocated in equities 14 years ago. Today, it is 52.3%.
In comparison, the California Public Employees’ Retirement System (CalPERS) – the largest pension system in the U.S. – had 51.4% of its allocation in public equities and 8% in private equity in 2021, while as of February, the California State Teachers’ Retirement System (CalSTRS) had 42.8% in public equities and 14.3% in private equity.
PERF’s 27% in private equity is up against the plan’s policy range of 27.5%. It has a target allocation of 20% to private equity and 30% to public equity. A key reason for private equity exceeding its allocation is that while Oregon issued $5.5 billion in capital calls to its private equity managers in 2021, it received distributions of $7.6 billion, or a net distribution of $2.1 billion. The fact that private equity has overtaken stocks is not surprising, considering it is far and away Oregon’s best-performing asset class. In 2021, it generated 42% and over 10 years has produced annualized returns of 16.25%.
PERF’s private equity program is comprised of 45 general partner relationships. It also looks to allocate to 10 to 15 opportunities annually and has a co-investment program which is handled by Pathway Capital. PERF has 5% of its assets in venture capital – a figure it is seeking to double in 2022.
Public equities are Oregon’s second-best sector over five years, but real estate is in that position over the seven- and 10-year time periods.
Private equity overtaking public equity was, in a sense, put in motion in 2014 when public equities were reduced, and private equity was slightly increased – a result of the pain the pension fund felt during the 2008-2009 period. During the March meeting, a board member asked why the fund was not increasing its allocation to private equity.
Rex Kim, chief investment officer for Oregon State Treasury, which oversees PERF, said the fund was not doing so because of “increased risk” and the “desire to diversity cash flow.”
Efforts to get further clarification on the risks that Kim sees in private equity were unsuccessful.
That being said, PERF also has 6.7% in real assets – which is comprised of infrastructure and natural resources and which Kim described as a hybrid of private equity and real estate. Real assets and another investment sector, diversifying strategies, were until October known as alternatives. Oregon had a 15% target to alternatives. It now has 7.5% targets for both real assets and diversifying strategies. As of February, PERF had only actually invested 3.7% in diversifying strategies, which is essentially comprised of hedge funds.
The remaining portion of PERF’s fund includes 20.8% in fixed income, 11.8% in real estate and 2.3% in risk parity.
Kim said that the current economic uncertainty – including the high rate of inflation – will not lead to significant changes to the fund. He said the fund is examining different ways to utilize its fixed income portfolio, using hedge funds as a “risk mitigating strategy” and putting in place “portfolio insurance.”