Small states have growing appetite for PE

The West Virginia Investment Management Board, which recently issued a request for information for third-party consultants to help build an alternative investment program, is one of several small states that are on the cusp of moving into private equity, or have recently done so. Others include Arizona, Mississippi, South Carolina and Vermont.

In the coming years, these states promise to funnel several billion dollars of new capital into the private equity industry, with much of it expected to go through funds of funds.

“I’m excited, but disappointed we weren’t able to do it six years ago,” says Craig Slaughter, executive director of the West Virginia state pension fund.

Similar to West Virginia, the South Carolina Retirement System took its time to break into the asset class. Before 1999, it was entirely invested in fixed income instruments. Last November, the state passed a constitutional amendment that allowed the pension fund to back private equity.

The South Carolina pension fund is now looking to be a more aggressive alternative investor as it has carved out a 5% allocation to venture capital and LBO funds and last year hired Bob Borden as its chief investment officer. Borden was previously executive director of Louisiana State Employees’ Retirement System.

South Carolina made its first PE commitment this year, backing the $1.1 billion Aquiline Financial Services Fund, which is managed by former Marsh & McLennan Cos. head Jeffrey Greenberg. All told, the pension fund plans to commit $750 million to private equity funds this year, and $3 billion over the next few years. It has not indicated how much of that will go to venture capital funds.

The Public Employees’ Retirement System of Mississippi, with $21 billion in assets, is looking to ultimately allocate 5% to private equity. But it will be at least a year before even $1 from Mississippi is committed to a general partnership. Following legislation that allowed the state to begin investing outside fixed income and equities, the pension fund is “really starting at square one” when it comes to private equity, says Chief Investment Officer Lorrie Tingle.

Tingle says that the pension fund is searching for a consultant and hopes to begin backing funds in 12 to 18 months.

Other pension funds appear poised to make similar moves into private equity investing:

  • Arizona State Retirement System allocated 5% to private equity last fall. CIO Gary Dokes says the money will go to both venture and buyout funds. Currently, the $26 billion pension fund is looking for a consultant to help it develop a strategy. Dokes says that the pension fund’s level of activity in the industry will only be “what would make sense in a market where valuations are high.”
  • The $3.8 billion Missouri Local Government Employees Retirement System recently created allocation targets of up to 5% for real estate and private equity. It reportedly plans to hire discretionary advisors over the next few years. A representative of the pension fund was not available for comment.
  • The Vermont Pension Investment Committee (VPIC), which oversees three pension funds with $2.9 billion in total assets, is looking to allocate 3% of those assets to private equity. Dave Minot, director of investments for the VPIC, says the process of breaking into private equity is “proceeding slowly.” He declined to comment on efforts to hire a discretionary advisor.
  • The Public Employee Retirement System of Idaho, which has $6.9 billion in assets, is reportedly trying to increase its PE allocation from to 7% from 5%.
  • The $14.6 billion Indiana Public Employees Retirement Fund recently moved from a 4% to an 8% target to private equity.
  • Finally, the $8 billion Louisiana Sate Employees Retirement System reportedly doubled its PE allocation to 10 percent. —Mark Cecil, Buyouts