LPs pile up on sidelines

Constrained by a lack of liquidity due to scant exits, limited partners are increasingly choosing to sit on the sidelines. An informal survey of LPs by VCJ found that three have no plans to make commitments this year, and another three are taking a wait-and-see approach.

The Michigan Department of Treasury is unlikely to commit to private equity this year as it’s already at the top of its allocation range for the asset class. Similar to other plan sponsors, improving liquidity is the top priority of the LP, which invests in venture capital, leveraged buyouts, mezzanine debt and special situations funds, both domestic and international.

“There may be an exception [to not committing this year], but right now liquidity trumps opportunity,” says administrator Peter Woodford.

Michigan’s target allocation to private equity is 16% of its $44 billion of total assets, with a range of 10% to 17 percent. As of Dec. 31, the actual allocation stood at 19 percent.

Also unlikely to commit to private equity in 2009 is the $1.8 billion Cincinnati Retirement System, with 5% committed to private equity and 17% committed to other alternatives.

The LP “must focus on liquidity issues for 2009,” says John Boudinot, executive director. He adds that no allocations are expected to be forthcoming.

The $692 million Ohio Highway Patrol Retirement System is in similar straits. It’s unlikely to make any pledges to private equity in 2009, according to Dick Curtis, executive director, who notes that the pension fund is currently above its 10% target allocation, but still within its range of 5% to 15 percent.

There may be an exception [to not committing this year], but right now liquidity trumps opportunity.

Peter Woodford

Other LPs simply don’t know when or how much they might be committing this year.

For example, the $40 billion Virginia Retirement System continues to evaluate investment opportunities, but cannot predict commitment amounts or strategies for the future, says Jeanne Chenault, spokesperson. As of April 7, the state pension fund had about 9.6% of its portfolio in private equity. Its limit is 10 percent.

Meantime, the $8.2 billion Los Angeles City Employees’ Retirement System has tried to get a better handle on its portfolio by adjusting its asset allocation plans. The LP expanded its private equity allocation range when the actual allocation surpassed its upper threshold for the asset class, but since then, the allocation has fallen back within range.

Currently, LACERS is in the middle of an asset allocation review that will determine how much more, if any, it will commit to private equity over the next one to three years, says CIO Dan Gallagher. As of April 2, the LP had an actual allocation to private equity of 10.4%, above its 8% target, but within its range of 3% to 12.5 percent.

The Santa Barbara County Employees’ Retirement System is also hedging its bets. The LP may commit anywhere from zero to $50 million to private equity this year, says Paul Yett of advisory firm Hamilton Lane.

The $1.3 billion county pension fund has a relatively new private equity program, begun in 2005, with a target allocation of 5%, and it usually commits $20 million to $40 million annually to the asset class. Yett says the LP has more to spend to reach its target, but he adds there’s no sense of urgency to do so. He’s looking at all strategies and regions of the world, including emerging markets. —Nancy Gordon