By David G. Barry
For the first time in three years, the Oregon Public Employees’ Retirement Fund (PERS) is at its target for equities – meaning that 50% of the fund is comprised of public equities and private equity.
That, in a sense, is the good news. The bad news is that the $94.5 billion pension fund reached that figure due to its public equities taking a major hit in April – providing a snapshot of the pain felt by institutional investors globally.
According to information released at its May 27 board meeting, PERS at the end of April had 22.6% of its fund in public equities and 27.8% in private equity for a total of 50.4% in equities. The last time PERS was at its target for equities occurred in May 2019 when it had 33.1% in public equities and 22.2% in private equity, putting it at its then-55% target allocation.
In July 2019 – the beginning of the fiscal 2020 year – PERS redid its asset allocation targets and dropped its equities target to 50%,the result of its public equities’ target being cut to 32.5% from 37.5%. Private equity stayed at 17.5%. Since that reduction, PERS’ actual allocation to public equities and private equity has been closer to 55% than 50%. In fact, in April 2021, the actual allocation was 55%.
The 50% target that PERS is seeking to meet is comprised of a 30% target allocation for public equities and a 20% target allocation to private equity. What this means is that while PERS hit its overall equities target, it is significantly overfunded to private equity and significantly underfunded to public equities.
As Markets Group reported earlier this year, PERS for the first time in February saw its actual allocation to private equity exceed its actual allocation to public equities. At that time, it had 27% of its fund, or $25.7 billion allocated to private equity, and 25.2%, or $24 billion, to public equities. The difference between the two asset classes was exacerbated by the freefall of stocks in April.
Between the end of March and the end of April, PERS saw its public equities decline from $24.05 billion to $21.38 billion, a loss of nearly $3 billion. With that decline, PERS’ allocation to public equities fell from 24.9% to 22.6%. On the other hand, private equity rose slightly between the end of March and the end of April to $26.3 billion from $26.2 billion. The pension fund also saw slight increases in the value of its diversifying strategies, real assets and real estate portfolios.
PERS’ experience – while extreme – is also indicative of what other public pension funds are experiencing with their private equity programs, due in part to the success that the asset class had in 2021 and the fact that PE financial reporting lags public equities by a quarter.
PERS, in a sense, set the stage for private equity to overtake public equities in 2014 when public equities were reduced and private equities were slightly increased – a result of the pain the pension felt during the 2008-2009 period. In fact, 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.
Private equity is PERS’ 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.
The Oregon Investment Council, which oversees PERS, approved commitments earlier this year to two Francisco Partners’ funds, a Veritas Capital Partners fund a Vista Equity Partners’ fund.