With the health and profitability of the private equity business under threat from the credit crunch, and talk of tax law changes in Washington, big investors might understandably be tempted to consider dialing down their exposure to riskier, illiquid assets. Not the Washington State Investment Board. Among big public pension plans, the $64 billion retirement fund is by far the most committed to alternatives, with 17 percent targeted to private equity and 12 percent to real estate. Hungry for returns, the board is poised to increase its holdings of illiquid investments; it is considering boosting private equity to as much as 25 percent, real estate to as high as 15 percent and adding 5 percent to real assets, a new asset class that includes infrastructure. The changes are based on a recommendation being developed by CIO Gary Bruebaker and his staff. The board, which will determine the final numbers, could decide as soon as its next meeting, scheduled for November 15, or possibly wait until December.
“We don’t think we have a liquidity issue,” says Bruebaker, comparing his pension fund’s investments to those of endowments and foundations that have been extremely aggressive in their alternative holdings despite having to disburse about 5 percent of their assets annually compared with about 2 percent for his fund. “I have lower liquidity needs, yet nobody thinks anything of [those foundations or endowments] having 50 percent of their assets in less-liquid investments.”
Washington State’s thinking reflects the confidence and experience it has gained since it helped to pioneer private equity investing with its decision to place $13 million with Kohlberg Kravis Roberts & Co. in 1981. Through the end of 2006, Washington had committed a total of $18.1 billion to buyouts and venture capital funds and generated $10.9 billion in profits for an annualized internal rate of return of 15.4 percent. Washington State will continue to invest mainly with its existing key partners, which include Fortress Investment Group, KKR, TPG and Warburg Pincus, Bruebaker says.
