Distressed portfolio outperforms for Ohio

Strong performance from OPERS' distressed debt allocations nevertheless failed to improve its flagging private equity portfolio in Q1.

The Ohio Public Employees’ Retirement System’s distressed debt control portfolio returned 20.7 percent for the one year period ending 31 March, according to documents made available to Private Debt Investor. 

The $80.3 billion retirement system’s non-control distressed portfolio returned 12.8 percent over the same period. Both are components of Ohio’s private equity portfolio, which represented 10.3 percent of the retirement system’s market value as of 31 March, according to a state report.

Ohio categorises distressed control and distressed non-control as a special situations sub-strategy, which comprised 39.9 percent of the private equity portfolio and returned 18.9 percent over the one year period concluding 31 March.

Unfortunately, the distressed portfolio’s performance failed to drive returns for the overall portfolio during the first quarter. Private equity produced a 1.9 percent return during the first quarter, which underperformed its benchmark by 1.5 percent.

“While shorter-term periods compared to the benchmark are presented, the long-term and illiquid characteristics of private equity make longer-term comparisons more appropriate,” according to a staff memorandum. “During the past three years the Program produced a 17.5 percent annualized return which outperformed the benchmark by 2.4 percent.”

Despite the distressed debt portfolio’s strong performance, the report indicates that Ohio is moving its private equity strategy away from the sub-strategy. Instead, the retirement system will likely focus its efforts on small and mid-market buyout strategies in developed markets.

Ohio plans to invest between $2 billion and $2.3 billion in private equity in 2013. It had closed on $1.15 billion in commitments for the year as of 30 June, according to the report.

The retirement system has placed a greater emphasis on finding favourable terms. Investment staff managed to negotiate for at least one of the following for each of its new commitments; reduced fees, reduced carry, preferred co-investment allocation or European-style waterfalls.