New Jersey’s $85 billion pension fund has sidestepped the denominator effect that has hammered asset owners which have struggled to escape from their overweight positions in private equity, especially in the years following the 2021 high. Now sitting on an underweight PE allocation and ample liquidity, the fund is eyeing opportunities to be a selective buyer in secondaries.
PE currently represent 9 per cent of the portfolio and sits under the fund’s long-term allocation of 11 per cent, which was just culled from 13 per cent in an April asset allocation study. Meanwhile the fund is holding 8 per cent in cash, about four times the long-term target.
“For some investors, [private equity] is under pressure and one of the reasons is because they’ve been over-allocated. We have the opposite problem – we’ve been under-allocating,” Shoaib Khan, chief investment officer of the New Jersey Division of Investment, tells Top1000funds.com in an interview.
The position is rooted in a defensive pivot in 2022 at the height of the Russian-Ukraine conflict and amid out-of-control inflation, which led to expectations that the Federal Reserve would have to dramatically raise rates. “We said cash is probably a good place to be… that [belief] still exists today. We are still overweight,” Khan says.
“Rates aren’t coming down anytime soon in a meaningful manner, which means our cash equivalents is still going to continue to deliver a reasonable return on the risk-free assets.
“Secondly, the geopolitical risks are still there. In fact, you could argue the geopolitical risks have increased.”
This means NJ Investments has plenty of dry powder to deploy opportunistically. One area it has been exploring is secondaries investment in private equity, though Khan says the program is in its “early days”. But he says, while the proposition seems attractive the fund has to be discerning around synergies with the existing PE portfolio.
“Of course price is a factor, but also the underlying [assets] that you are picking up is important because you may just be doubling up on some of the companies you already have, and then you’re out of bounds in terms of your risk management parameters,” he says.
Other allocation priorities in the PE portfolio include a continuous focus on the lower middle market, including mid-to-small market buyouts, as well as venture and growth strategies. It’s important in ensuring that New Jersey invests across the spectrum as private market GPs raise increasingly colossal funds.
“There’s been a fair amount of capital that has come into all private asset classes… you’re seeing more of that now with the retail money, the 401(k) money, the wealth managers that are coming in,” Khan says.
“Previously you would see capital raising for a $3 billion fund, you now see $10 billion funds being raised… that universe where you can deploy it changes because there are some smaller deals where you couldn’t be active.
“From our perspective, while we understand that the [bigger] GPs are unable to commit to the midsized or the smaller deals, we don’t want to miss out on those opportunities.”
Emerging manager program not a ‘shortcut’
It comes as NJ Investments is set to host its next round of meetings with emerging PE managers next week. The fund invests in a separately managed vehicle with Barings, which is in turn responsible for sourcing managers, due diligence, portfolio construction and ongoing monitoring. It partners with GCM Grosvenor for similar programs in real estate and private credit.
“We said, ‘look, if we start to do work on all these smaller managers, we’re not going to have time to do the other stuff’. We can’t let part of our portfolio go on the side while we do this work,” Khan said.
“We don’t tell them [Barings] where to invest, whom to invest with, but we have the ability to say no.”
Firms eligible for the program need to have under $3 billion in assets under management and are raising capital for no later than their first three funds. Despite being a dedicated program for small managers, Khan says it’s not one that offers “shortcuts”.
“While we don’t necessarily need a track record of the fund, the vehicle and the firm that we’re investing in, there has to be a track record for the team or the portfolio manager that’s going to run it,” he says.
“Then the operations – while they may be building out some of the operational aspects, the structure must be there.”
The fund is committed to growing with high-quality emerging managers over time which is why it also has a sleeve of the fund dedicated to “transition managers” with Barings, which are open to mid-sized firms that don’t necessarily qualify as emerging managers.
“The parameters [of manager] change a little bit, but the quality still has to be there.”
NJ Investments’ underweight in private equity is not an outlier. Its allocations across the alternatives spectrum are all sitting below their policy targets, including private credit (6.6 per cent actual allocation against 9 per cent policy allocation), real estate (5.8 per cent actual against 7 per cent policy) and real assets (2.6 per cent actual against 4 per cent policy), according to its May financial report.
In terms of risks, the worst-case scenario for the portfolio in the next 12 months is rates coming down too quickly, which means the fund’s cash portfolio won’t deliver as much return and needs to be deployed quickly, Khan says.
“But when rates come down, it creates opportunities in other strategies and asset classes, so that wouldn’t be problematic.
“Because we have the liquidity, we have the ability to do that relatively quickly. So I actually sleep well at night with the portfolio the way it’s positioned.”
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