Friday, May 10, 2024

Oregon Pension Fund: Too Much Illiquid Stuff

From Top1000Funds, May 8:

Looking for the exit: Oregon battles overweight allocations to illiquids 

Oregon Investment Council, which oversees $140 billion of investments including the $97 billion Oregon Public Employees Retirement Fund, OPERF, currently has 55 per cent of its assets in private markets, well above its target allocation of 40 per cent. The overweight to illiquid investments that can take years to sell is a growing source of consternation for chief investment officer, Rex Kim.

“We have much less liquidity in our portfolio now,” says Kim in an interview from the fund’s Tigard investment headquarters.

Oregon is not alone. According to analysis from CEM Benchmarking, average LP allocations across private equity, infrastructure, and real estate were at or above target allocations as of the beginning of the year. Meanwhile a lack of exits and rebounding valuations have driven net asset values (NAVs) higher. Analysis from McKinsey and global private markets firm StepStone Group suggests that an overallocation of just one percentage point can reduce planned commitments by as much as 10 to 12 percent per year for five years or more.

One way the Oregon team are approaching the problem is by reducing risk in the liquid portfolio. Comprising fixed income, public equity, and hedge funds, it is supposed to be split 55:45 between stocks and bonds respectively. Today it is tilted 40:60 in favour of bonds.

“We have decided that the mix of this piece of the portfolio needs to be less risky. We look at the risk level of the liquid portion of the portfolio relative to how much weight to illiquids we have, and we want this part of the portfolio to be less risky so it has lower drawdown potential and enables us to pull funding from it overtime.”

To illustrate the problem Kim turns to the real estate portfolio where Oregon has a 12.5 per cent strategic allocation which is currently overweight at 14 per cent. He says the market is struggling to find the right pricing thanks to a vicious circle of lacklustre transactions and little price discovery that means Oregon is struggling to value the assets it is sitting on....


Previously at Top1000Funds:
February 1, 2024
Private equity angst at Oregon