WSIB increases PE allocation by 8%

The Washington State Investment Board has said private equity outperforms ‘traditional investments’ and upped its allocation target for the asset class to 25 percent. The US pension also created a 5 percent allocation for ‘tangible assets’, which include infrastructure investments.

Private equity has been given a glowing testimonial by the Washington State Investment Board, as the $82 billion (€56 billion) pension giant recently shifted its allocation target for the asset class from 17 percent to 25 percent.

“We are mindful of the challenges associated with investing in private equity, but in exchange for assuming the additional risks the state's pension funds are being rewarded with higher and stronger investment returns than could be obtained through more traditional investments,” WSIB executive director Joe Dear said in a statement. “We currently have 20 percent invested in private equity and despite the current turmoil, given our long-term investment horizon the board believes raising the target to 25 percent is a reasonable and prudent strategy.”

Despite the current turmoil, given our long-term investment horizon the board believes raising the target to 25 percent is a reasonable and prudent strategy.

Joe Dear

The WSIB, which manages 16 state retirement and public pension funds, said the decision was based on two fundamental beliefs: that private equity outperforms public markets (the pension projects the asset class’ returns to beat public equities by 4 percent, long-term), and that the pension’s relationships with top quartile fund managers will enable it to deploy capital as projected.

“The WSIB is already among the largest public pension fund investors in private equity in terms of portfolio allocation,” the pension said. “A 25 percent allocation is more typical of an endowment than a pension fund and this very difference, maverick risk, will expose the WSIB to doubt and second guessing whenever private equity results trail those of public markets.”

Though future boards could disagree with the current allocation strategy, particularly during times of private equity underperformance, the WSIB’s current board was careful to consider liquidity needs to ensure forced sales of illiquid assets would not be necessary, it said.

The WSIB also increased its real estate allocation from 12 percent to 13 percent, and created a new asset class, tangible assets, to which it will assign 5 percent of its capital. Tangible assets include infrastructure investments and are “likely to have returns that are relatively uncorrelated to other asset classes”, the pension said. “Additionally, some sectors in tangible assets have comparably strong correlations with anticipated inflation.”

Between its launch in October 1981 and 30 June 2007, the WSIB’s extensive private equity portfolio has resulted in $12.5 billion in profits. Last year, the asset class returned 33.7 percent.

In February, the pension pledged to commit $500 million toward Kohlberg Kravis Roberts’ first Asia-dedicated buyout fund, $205 million to Green Equity Investors V, $250 million to Providence Equity Partners VI and an additional $100 million on top of the $200 million it had committed to Blackstone Capital Partners V.

In March, the WSIB replaced its advisor Pacific Corporate Group with Capital Dynamics and also agreed to commit $125 million to Asia Opportunity Fund III, managed by CCMP Capital Asia, and $100 million in Endeavour Capital Fund V.

Earlier this month, the pension agreed to commit $750 million to Warburg Pincus Private Equity X fund, $25 million to Advent Latin American Private Equity Fund IV, $50 million to Avenue Special Situations Fund V and $700 million to the KKR European Fund III.