Princeton University to Cut 50% of Private Equity Managers

The $14.4 billion endowment of Princeton University is planning to terminate 50% of its private equity managers, reducing its investments in leveraged buyouts.

(October 25, 2010) — Princeton University, the third-richest US school, plans to drop half of its $14.4 billion endowment’s private equity managers as it curbs investments in leveraged buyouts, Bloomberg is reporting.

“Our mantra is fewer, better, stronger relationships,” Chief Investment Officer Andrew Golden said in an interview with Bloomberg. “It applies across the board but most significantly to buyouts,” the largest piece of the university’s private equity holdings, said Golden, who has followed the approach of David Swensen, chief investment officer of Yale University, toward a strategy of helping endowments beat market indexes by relying on assets such as commodities, real estate and private equity.

Following the financial crisis of 2008, private equity stakes consisted of more than 35% of the university’s endowment, surpassing the target of 23%. In the past year, private equity generated a 19% return for the university, following behind the 43% gain by emerging markets stocks and the 23% increase by US equities. In the year ended June 30, Princeton’s investments gained 15% outpacing returns by both Harvard University and Yale, whose funds gained 11% and 8.9% respectively.

Separately, according to new research by State Street, private equity funds have posted a return of just 0.65% in the three months to the end of June this year. The research also showed private equity recorded a 19.2% return over the year to the end of June and mezzanine and distressed debt funds combined recorded a 27.9% return over the same period. While buyout funds and venture capital recorded 11.4% and 8.7%, respectively, distressed debt and mezzanine funds posted an 11.2% return since inception.

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

With only 24 of 73 pensions with assets over $1 billion currently considered funded, it's clear that serious issues need to be tackled, the report by Loop Capital Markets notes.

(October 25, 2010) — Twenty-five US states have contributed less money to their retirement funds in 2009 than the annual required contribution (ARC) that actuaries calculated for each of them. The number was slightly higher from 23 a year earlier, according to a recent survey by Loop Capital Markets.

“I think this problem is really analogous to the individual investor trying to save for retirement,” Christopher Mier, Loop’s lead municipal strategist, told aiCIO. “It’s very hard to come up with a number for annual contribution – each state needs to make a substantive payment every year – it’s got to be something based on the numbers actuaries have provided. Pension holidays, a euphemism for states that fail to make an annual contribution, need to stop,” he said, adding that he believes funding will improve marginally with increased political pressure in 2010.

The firm’s eighth annual report found that 25 states failed to make adequate payments into their pension for teachers and public employees for any of the three years from 2007 to 2009. States that did not meet their contribution levels for all plans for the last three years include Alaska, California, Colorado, Delaware, Illinois, Iowa, Maryland, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, Pennsylvania, Vermont, Virginia, and Washington.

“The approach to valuing pension liabilities is more cut and dried in the corporate market, because unlike the public sector, they have more explicit rules that keep them much more focused on the straight and narrow. With the public sector, there’s no ERISA, for example, so when times get hard, they tend to underfund.”

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Mier said states need to recognize the funding problem and contribute as much as possible this year, and all future years. The study by the Chicago-based investment bank reviewed a total of 244 of the largest state plans and discovered that the funded ratios have worsened for nearly all the plans that submitted funded ratios. About 93% of the 145 state plans reviewed in both 2008 and 2009 that submitted funded ratios witnessed declines, and only 58 of a total of 149 plans reviewed for fiscal 2009 reached the 80% funded ratio that is considered adequate. Only 24 of the 73 plans with assets of more than $1 billion met the 80% threshold, according to the report.

The report found that while the average returns were significantly higher than the assumed average investment return assumption of 8%, they were still not sufficient to cover the severe losses experienced in the last two fiscal years as a result of the current recession, which left states facing a total of $110 billion in revenue shortfalls, according to the Washington-based Center on Budget and Policy Priorities. According to a Bloomberg analysis of state pensions, funding levels across the 50 states ranged from 51% in Illinois to 107% in New York.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742