HARTFORD, Conn. – The State of Connecticut Treasury Department has begun renegotiating its position in private equity partnerships because it believes it is overexposed to alternative assets.
The case may mark the first example of a limited partner looking to pare back partnership commitments across the board.
The $18.5 billion pension, for now, is looking to reduce the venture capital, buyout and real estate fund commitments it made in the fourth quarter, but it may soon approach other partnerships to which it committed from July 1997 to September 1998.
Connecticut’s aim is to reduce the amount of capital it committed to alternative assets by between $400 million and $600 million in the coming weeks, said Howard Rifkin, deputy treasurer. The pension has $3.56 billion committed to alternatives.
By all accounts, the situation at Connecticut at the end of 1998 was unusual and created a dilemma for the treasury. In November, Treasurer Paul Silvester lost a close election to Denise Nappier. The treasurer has sole control of the pension, and Mr. Silvester committed $852 million to alternatives in his final three months in office. This move increased the pension’s commitments to alternatives by 25% to an amount equal to 19% of the pension’s funds under management. Connecticut now has 7.5% of its pension invested in alternatives and has an 11% allocation level for the asset class, a percentage the pension will soon surpass if it does not make reductions in its commitment level, Mr. Rifkin said.
The pension wants to make the reductions now before it is forced to accept discount prices in the secondary market to reduce its exposure, sources at the pension said. Mr. Silvester did not return calls.
Mr. Rifkin defended the move by saying the treasury is fulfilling its fiduciary duty by paring back commitments. He said he believes the pension is in danger because it has too much illiquid capital concentrated in one-and-a-half vintage years – it committed $2.42 billion to alternatives from July 1997 to December 1998 – in one asset class.
“I would say, by and large, partnerships have been understanding and have tried to be reasonable because they see us as long-term partners,” he said.
However, Connecticut cannot legally reduce its commitments in any of its venture capital or buyout partnerships without consent, except for one in which it has super majority rights, Mr. Rifkin said, declining to name that partnership. The pension has no plans to default on any of its commitments if it cannot negotiate a solution, he added.
Connecticut made commitments to several VC partnerships late last year, allocating $25 million to Pharos Capital Partners, L.P., $27.5 million to Keystone Venture V, L.P. and $100 million to Crescendo Ventures III, L.P. The pension also committed $50 million each to Grotech Partners V, L.P. and SW Pelham Fund, L.P.
So far, G.P.s had mixed reactions to the unusual move, according to interviews with partners who have been recently approached by the pension. Thayer Capital Partners has been the only firm so far to reach an agreement with the pension, while one G.P. from another firm said his group would not negotiate with Connecticut and would not accept a commitment from the pension when it raises its next partnership.
As for Connecticut, it would still have the option of selling its commitments in the secondary market if it cannot reach agreements with the firms, Mr. Rifkin said.
Although secondary investors might be hesitant to acquire unfunded commitments, they might be interested in buying a funded and unfunded stake together at full price. In this manner, the secondary investor could reap the benefits of investments already made and help the pension quickly reduce its commitment level, an intermediary said.
Connecticut’s Reputation Is at Stake
Connecticut is known for being a tough negotiator. Additionally, the pension in 1997 scaled back its commitment to Kohlberg Kravis Roberts & Co. from $150 million to $50 million, and it threw another G.P. for a loop the same year.
“They made a significant commitment, and they pulled out at the last minute because of a political makeover,” a source who worked closely with the firm that lost the commitment said.
Connecticut has had three treasurers in the last five years, creating disruption at the pension.
However, Connecticut believes G.P.s will understand the current situation. “I think that we hopefully will do a good job of getting our story out, and G.P.s will see this as an extraordinary circumstance and realize that this is not the way we would like to behave,” Mr. Rifkin said.