Oregon Backs Off from VC Funds

The Oregon Public Employees Retirement System made 14 private equity fund commitments totaling more than $3.2 billion in 2017, but none of the commitments were in venture capital funds.

Venture capital funds make up 10.5% of the fair market value of the pension plan’s $14.6 billion private equity program, show system statistics, but an internal review of the program last month found that VC investments are on the decline as legacy VC fund of funds investments liquidate.

“That exposure is being replaced by a growing allocation to growth equity,” the review stated.

Growth equity funds make bigger bets than venture funds and focus on buying portfolio companies beyond the start-up stage with proven business models. Only 4.2% of the private equity program’s fair market value is attributed to growth equity funds, but the percentage is expected to grow in coming years.

The pension system committed to two such funds last year.  The review said the pension plan committed $200 million to the TPG Growth Fund IV and $135 million to the Orchid Asia VII Fund. The two funds made up approximately 10% of the more than $3 billion in private equity commitments in 2017; the rest of the money went to buyout funds.

The problem is that venture capital commitments can only go so far in a large private equity program like Oregon’s, which, in an average year, is trying to put $3 billion to work, said John Skjervem, chief investment officer of the Oregon Investment Council.

“Your venture capital partner in a good year needs $50 million, it’s just not a space that can scale,” he said.  

The Oregon pension plan made three commitments to venture funds in 2016, show system data, but all three combined amounted to just $139 million out of a total of $3 billion that the retirement fund invested in private equity that year.

In comparison to venture capital, Skjervem said, growth equity funds require more money from institutional investors.

 “So, it’s at that point where the needs for capital are greater, so investors like us can put more substantial amounts of money to work,” he said.

Regulatory filings last year showed that Orchid Asia Group, the Chinese firm offering the Orchid Asia VII Fund, planned to make investments between $20 million and $150 million in companies with a minimum enterprise value of $50 million. The fund has raised at least $1.3 billion, show the regulatory filings.

TPG Growth, a middle-market and growth equity platform of alternative asset firm TPG, announced in December that it had raised $3.7 billion from institutional investors for Growth Fund IV.

Skjervem said the investment staff continues to look for potential venture capital opportunities. He acknowledged that some members of the Oregon Investment Council have questioned why the pension fund should invest in venture capital funds at all, but he said that such investments can teach the investment staff.

“It’s important to be involved because we’ll be better investors,” he said.  “Or conversely, if we ignore it, we won’t be as good of investors as we could be.”

Skjervem said many corporate enterprises started at one point as an entrepreneur’s dream and then came to life through venture capital, ultimately ending up through an IPO as a successful public company.