North Carolina mulls PE increase

A law passed in June would allow the $65bn pension system to raise its allocation to private equity, to the chagrin of some lawmakers who don’t like the asset class.

North Carolina’s Governor has authorised its state treasurer to boost the total amount the state pension system is allowed to invest in private equity to 7.5 percent of total portfolio assets from 5 percent.

Governor Beverly Perdue signed the bill into law in June that allows the allocation percentage change. The bill also allows for the investment of up to 6.5 percent of the total value of the portfolio in long-short hedge fund strategies within the public equity portfolio.

The state pension system’s investment division is reviewing the investment strategy and “making plans to incorporate the new flexibility afforded in the bill”, a Treasury spokesperson told Private Equity International. The pension underperformed its benchmark for the fiscal year ending 30 June, 2011, returning 14.2 percent, compared to its 21.5 percent benchmark.

The pension had blown through its 5 percent allocation cap, which is why the change was necessary, said state Representative Dale Folwell, one of the sponsors of the bill authorising the allocation increase. As of June, the system’s actual allocation to private equity was 4.8 percent, and that was after it had sold about $850 million worth of private equity holdings on the secondary market. It’s not clear what the allocation was prior to the secondary sale.

The $75 billion pension system’s private equity portfolio was affected by the so-called denominator effect in late 2008, when the value of its private equity holdings as a percentage of the total fund increased as the fund’s more liquid investments tumbled. To combat the bloated allocation, the treasurer created the credit and inflation asset classes, moving some illiquid investments and reducing the overall allocation percentage to alternatives. The secondary sale also helped ease the pressure, but ultimately a boost in the cap was deemed necessary.

Private equity is something that's very hard to calculate, its value, and when you have liquidity crunches, it's almost impossible to equitise.

State Rep. Dale Folwell

Two lawmakers who sponsored the bill allowing the greater allocation to private equity, Folwell and state Representative William McGee, both said they don’t think the fund should have more exposure to private equity.

The investment division actually wanted a higher increase in the allocation but had to settle for 7.5 percent, McGee said.

“The private assets allocation would assume risk in illiquid assets to a greater extent than I would like,” McGee said.
The illiquid nature of private equity has proven to be problematic in the past, Folwell said.

“Private equity is something that’s very hard to calculate, its value, and when you have liquidity crunches, it’s almost impossible to equitise,” he said. “I’m not fond of these investments at all.”

North Carolina has been a private equity LP since 2001 and the total value of its portfolio was about $3 billion as of June. The portfolio was built up under the watch of former chief investment officer Patricia Gerrick, who was fired in 2009 for undisclosed reasons. Gerrick had headed private equity at the pension for five years.