The Nevada Public Employees Retirement System has not exactly been a trailblazer when it comes to private equity investing – the $12.1 billion pension allocates 2% of its capital to the asset class and has no plans to increase the percentage – but Nevada has done well in the alternatives arena and plans to stick around, investing in four to six funds in the next year, says Laura Wallace, the pension’s investment officer.
The pension dedicates almost half of its private equity allocation to domestic leveraged buyouts or acquisitions and slightly more than half to domestic non-acquisition alternatives. Of the latter group, venture capital receives 20%, equity infusions 13%, recovery 6% and special situations 8%. International private equity accounts for the remaining 6%. Nevada’s target return for the asset class is the consumer price index plus 12%, according to the pension.
Pathway Capital Management L.L.C., the pension’s discretionary adviser since 1991, gives Nevada access to some of venture capital’s leading firms, despite its relatively small program. Among its roster of venture capital firms are Summit Partners, TA Associates/Advent Ltd., Menlo Ventures, El Dorado Ventures, Domain Associates and HealthCare Ventures L.P. The pension prefers to invest $4 million to $10 million in each partnership, and Pathway is scouting for four to six partnerships for Nevada to back in fiscal year 2000, which begins July 1. The plan expects to invest some $45 million to $60 million over 12 months.
Since the inception of its private equity program, Nevada has invested in more than 35 funds, beginning with two investments in 1984 and increasing the commitment pace to a record five funds backed in 1998. In fiscal year 1999, the pension invested $10 million in the early-stage venture fund Menlo Ventures VIII L.P. and another $15 million in two buyout funds – $8 million in Cypress Merchant Banking Partners II L.P. and $7 million in Madison Dearborn Capital Partners III L.P. The pension’s alternatives program’s internal rate of return for fiscal year 1999 was estimated to be 29% at press time, almost doubling the projected return of 14% to 18% set at the beginning of the year. The program’s IRR since its inception is 24.4%, Ms. Wallace says.
Pathway seeks to diversify Nevada’s private equity investments by vintage year so as not to concentrate too much money in funds of the same maturity level. Nevada has committed $90.7 million to 15 partnerships in the investment stage, and Pathway predicts the pension will write checks totaling $27 million this year as capital is called down. From inception of its alternative investing program through June 1999, Nevada received $143.4 million in distributions, more than the total capital the pension has actually invested in the asset class so far.
Nevada credits its adviser with the pension’s decision to continue private equity investing. After disappointments with two venture capital investments, the pension turned to Wilshire Associates in 1985 for investing advice. Nevada worked specifically with Douglas LeBon, a partner at Wilshire, and James Reinhardt, a senior associate. When the two left Wilshire and formed Pathway in 1990, Nevada followed as one of their first clients.
As Nevada’s non-discretionary adviser, Pathway first proposed a $4.6 million investment in Lawrence, Tyrrell, Ortale & Smith II L.P. in 1990. Because of Pathway’s private equity expertise, Ms. Wallace recommended in 1992 that the Public Employees Retirement Board switch to a discretionary relationship with Pathway, which it did.
Even as Pathway began developing Nevada’s domestic program, the consultant was eyeing international investing as well. In 1991, the gatekeeper suggested the pension invest in private equity funds with an allowance for international investing. Nevada agreed, and soon thereafter Pathway committed $9.7 million on the pension’s behalf to Hellman & Friedman Capital Partners II L.P., a buyout fund that invested in media, communications and financial services companies primarily in the United States, but also in Asia and Australia. Four years later, Nevada formally added global private equity to its investment strategy, giving Pathway full discretion to back such partnerships as a way to gain more diversification and potential for greater returns, Ms. Wallace says.
In 1996, Pathway invested $5 million in CVC European Equity Partners L.P., a buyout fund with a Pan-European strategy. The fund invests in manufacturing and consumer related industries, focusing on companies in Western Europe, including the United Kingdom, France, Germany and Scandinavia. Pathway committed an additional $7 million to CVC European Equity Partners II L.P. in 1998. To date, slightly more than 8% of Nevada’s private equity asset allocation is committed to international vehicles, and the pension has been pleased with the results of its non-U.S. investments, Ms. Wallace says.
Going the Distance with Pathway
The key traits that attracted Nevada to Pathway were its cohesive management team, experience in a variety of private equity areas, identifiable deal flow and exit strategies, Ms. Wallace says. Occasionally, Nevada receives solicitations for additional advisers, but at this point the fund is too small to warrant a multiple-adviser structure, she says.
Callan Associates has been the fund’s general consultant for the last 10 years. Callan does not make investments for the pension but provides guidance and recommendations on policy issues, advice on tactical plans and monitors the performance of managers. The adviser’s contract with Nevada is open-ended, and its performance is evaluated annually.
The pension’s investment team consists of Ms. Wallace, who has been with Nevada for 20 years, Analyst Ken Lambert, who has been with the pension for three years, and a support staff. The investment team makes recommendations to the Public Employees Retirement Board, which was appointed by former Governor Bob Miller. Board members include representatives from employee groups that contribute to the pension, including teachers, police officers, city and county employees, state employees, fire fighters, administrators and retirees.