Cash backtrack

Christopher Witkowsky finds investors keen to withdraw apparent pledges to private equity funds

With everything else that general partners have to worry about these days, one thing they're hoping does not become a major headache is investors pulling back on hard circle commitments. Some recent developments, however, suggest such pain may be unavoidable.

A clutch of limited partners have cancelled planned commitments – which used to be almost iron-clad agreements – to ease pressure from over-weighted private equity allocations and general liquidity problems.

“When an LP asked to reserve a spot in a new fund, that used to be sacrosanct,” says one managing partner of a US mid-market private equity firm. No longer. Several sources say they expect more LPs to pull back on planned commitments in the period ahead.

The $59.2 billion New Jersey State Investment Council is one heavyweight investor looking for more planned alternatives commitments to cut, according to minutes from its January meeting.

The pension's executive director William Clark said “the division had gone through the alternatives portfolio and was proposing a series of steps with the net effect of reducing or eliminating previously announced commitments, in order to permit a great focus on credit-related opportunities and preserve flexibility for superior investment opportunities likely to be available throughout 2009”.

New Jersey's target allocation to alternatives is 10.3 percent, while its actual allocation is 15.7 percent. It has already canceled a planned $50 million commitment to the UK's Charterhouse Capital Partners IX, which was originally targeting €6 billion and is now looking to raise €4 billion. The investment council also decided against a $150 million commitment to Morgan Stanley Real Estate Fund VII Global, which is targeting $10 billion.

New Jersey also reduced the size of already-closed commitments with funds managed by TPG after the mega-firm chose to shrink the size of the funds.

Perhaps the biggest shock so far came when the $45.4 billion Pennsylvania Public School Employees' Retirement System (PSERS) pulled back on hundreds of millions of dollars in commitments to private equity firms including Cerberus Capital Management, Gold Hill Capital, Apollo Group, HgCapital and Cardinal Ventures Partners.

A pension spokeswoman said PSERS has cancelled the planned commitments because it is above its target allocation to private equity. The pension has a long-range target allocation to private equity of 14 percent, and an actual allocation of 24 percent.

“We are not trying to get out of our existing commitments or contracts. These were deals which were never executed or finalised and we decided to not fund them at this time,” according to the spokeswoman. “We did not have signed contracts on these deals … the decision has nothing to do with the quality of the funds and we would still consider them if they were still open when the situation changes.”

The pension is not looking for any new relationships with private equity managers, the spokeswoman adds.

Pennsylvania's decision to back away from planned commitments was followed by the $28 billion Alaska Permanent Fund, which also canceled planned commitments to infrastructure and private equity funds. The board of trustees, which manages the state's national oil fund, decided to pull back on a planned $250 million commitment to Alinda Capital Partners' second infrastructure fund, Alinda II, which is targeting $3 billion.

The Alaska board also rescinded a planned $400 million commitment to the creation of a single investment vehicle to be set up by Pathway Capital Management. The buyout fund of funds, to which only Alaska could contribute, would specifically only target private equity funds investing in companies valued at $1 billion or less.

Alaska cancelled the commitments because of the decline in the value of the fund and “the need to balance toward core asset classes”. The fund's assets were valued at $28.8 billion at 31 December 2008, down $4.2 billion from its value on 30 September 2008. The fund stood at $40 billion in October 2007.

Alaska has a target for private equity of 6 percent, with an actual allocation of 2.8 percent; 3 percent to infrastructure; and 10 percent to real estate.