North Dakota Paves the Way for More General Partners –

Can a pension fund truly diversify its private equity investments by investing in only two firms? North Dakota’s State Investment Board, which devotes 4% of its $2.3 billion investment pool to the asset class, has been quite successful using that particular strategy for the past 10 years. But things are about to change.

The state pension will increase its allocation to private equity by an undetermined amount in the coming months. The additional commitments to venture capital will mean another investment in one more fund run by one of its existing venture managers as well as the addition of a new venture firm in the next two or three years.

“We tend to be exclusive in picking our general partners, but we like to cast a broad net across all types of private equity,” says Steve Cochrane, North Dakota’s investment director, who declines to name potential candidates to fill the new venture firm spot.

Selecting a new G.P. should take some time – after all, North Dakota’s Consolidated Pension Trust has spent the last decade investing only with Brinson Partners Inc. and Coral Partners. The pension’s five-member investment team had been satisfied limiting itself to those two venture firms because each had well-developed contacts and existing pipelines to investments. They also had qualities that matched North Dakota’s investment strategies: Brinson has a top-notch investment staff and offers fund diversification, while Coral invests in companies located in the Midwest, Mr. Cochrane says. North Dakota gives both Coral and Brinson full discretion to invest its money. So far the firms have put 85% of the pension’s capital to work in domestic venture capital deals and 15% internationally.

North Dakota began investing in private equity in 1989, under then-Director Leroy Gilbertson. During Mr. Gilbertson’s three-year tenure, followed by a five-year term under Karen Kellerman, the pension limited its venture investments to three funds under Coral and Brinson. In January 1997, however, Mr. Cochrane, former president of Orlanda, Fla.-based Gryphon Capital Management, joined North Dakota’s investment staff and decided to shake things up a bit. He was the brainchild behind a new strategy to diversify investments by stage, industry and geography, and he implemented the pension’s expansion from three venture capital funds to its current eight under Coral and Brinson. The success of North Dakota’s private equity investments, which have had rates of return averaging between 20% and 35% for the last five years, was the main reason behind Mr. Cochrane’s decision to devote more capital to the asset class.

North Dakota’s current private equity allocations were devised by the state’s Teachers Fund for Retirement, Public Employees Retirement System, City of Bismarck Police Pension Fund, City of Bismarck Employees Pension Fund and Job Service North Dakota Pension Fund, all of which make up North Dakota’s Consolidated Pension Trust. The 4% allocation is devoted to venture capital, leveraged buyouts, mezzanine debt and some distressed situations.

Minnesota-based Coral, which primarily backs early-stage health-care and high technology companies in the Midwest, has managed 28% of North Dakota’s venture investments since 1990. North Dakota began its relationship in Coral Partners II, which closed in July 1990 on $63 million. That was followed by another investment in Coral Partners V, which held a final close in July 1998 on $112 million. Some successful portfolio companies include Minneapolis-based companies Optical Solutions Inc., which develops and markets telecommunications systems, and Macromedia Inc., which develops, markets and delivers software for digital media creation and delivery for Windows, Macintosh and the Internet.

North Dakota began its relationship with Brinson in 1989 by investing in its Institutional Venture Capital Fund (IVCF) II, which closed in 1989 at $50 million, followed by IVCF III in 1993, which closed at $120 million, and Brinson Venture Capital Fund IV. The fund, worth $178 million, closed in 1998 and is still being invested. Brinson invests in first- and second-stage communications and software-related deals across the U.S.

At the same time, in 1988 and 1999 North Dakota invested in the $1.5 billion Brinson Partners Fund, a fund-of-funds that re-opens at the beginning of each year. The pension also has invested in the $220 million Brinson Non-US Partner Fund, primarily a European fund-of-funds. North Dakota has never engaged in direct investing and has no plans to do so.

North Dakota’s investment team includes Mr. Cochrane, Connie Flanagan, supervisor of fiscal management, and a support staff. The investment team makes recommendations to the 11-member North Dakota State Investment Board, which votes by majority.

Callan Associates of San Francisco has been the pension’s general consultant since 1983.

Assets: $2,289.4 million

Cash & Short Term: 1%

Bonds: 22.9%

Bonds-Indexed: 6.5%

Stocks: 31.7%

Stocks-Indexed: 14.7%

Real Estate Equity: 7.4%

International Bonds: 4.4%

International Stocks: 11.4%

Private Equity: 4%