Earlier this year, lawmakers gave the go-ahead for Georgia’s public pensions to start putting money into start-up ventures and other “alternative” investments.
The move ended Georgia’s status as the last state that detoured most of its big pension plans for state, county and city employees around such investments.
Supporters hoped the new law would help rev up the state’s economy by making it easier to attract investment firms and get capital to Georgia’s entrepreneurs. By boosting local access to capital, proponents said the measure would slow the exit of young, high-tech firms that get funding from outside Georgia and then leave for other parts of the country like California’s Silicon Valley.
But someone forgot to release the parking brake on the new initiative, according to some pension experts. Most of the affected pensions haven’t made any alternative investments yet.
Critics say the new law makes it difficult for Georgia’s retirement plans to ever come close to putting 5 percent of their portfolios in start-up ventures or other long-term alternative investments, as lawmakers intended.
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The law, which took effect July 1, allows most of Georgia’s largest public pension plans to put money in a grab bag of alternative investments, including private equity partnerships that invest in start-up companies or leveraged buyouts of mature companies. Other alternatives include hedge funds, commodities, and debt of struggling or bankrupt companies. Many investments require capital to be committed for a decade or longer.
The law excluded the state’s largest public pension, the $53.5 billion Teachers Retirement System of Georgia, from making such investments.
Most states’ pension plans have piled into the high-risk investments over the past decade, arguing that it boosts returns over the long run and diversifies their portfolios, which can reduce risk. Alternative investments now account for 12 percent of states’ pension portfolios, on average, according to the National Association of State Retirement Administrators.
In Georgia, most of the state’s largest public pensions can invest up to 1 percent of their portfolios each year in alternatives, until they reach a 5 percent cap. The law covers the state’s second-largest public employee pension, as well as dozens of other state and local plans, with roughly $19 billion in assets.
The new law “removes the stigma of Georgia being the only state” that doesn’t allow its public pensions to make alternative investments,” said John Krueger, senior vice president of public policy for the Georgia Chamber of Commerce. “Georgia looked behind the times.”
Besides helping to draw investment firms and generating more capital for local ventures, the law should boost Georgia pensions’ investment returns over the long run, he said.
But most pension plans are taking a go-slow approach.
“For us, it’s all start-up,” said James Potvin, executive director of the state’s second largest plan. The $14 billion Georgia Employees Retirement System recently hired two people to develop its alternative investments strategy, but hasn’t made investments, he said.
Fulton County’s $1.1 billion employee pension plan decided to skip such investments for at least a year, citing private-equity managers’ high fees and lengthy lock-up periods for investments.
Officials at DeKalb County’s $1 billion pension plan are “exploring” the idea, but haven’t invested or met with alternative money managers, said Joel Gottlieb, DeKalb County’s chief financial officer.
Atlanta’s three pensions, with almost $2.4 billion in total assets, have committed to invest $74 million with two alternative money managers, but haven’t cut any checks yet. Of the total, $64 million will go to GrayCo Alternatives II, a so-called “fund of funds” based in Atlanta that invests in other alternative investment funds. Another $10 million will go to a Chicago-based fund.
“We’re very excited about the changes because it opens up a new set of investment options,” said Yvonne Yancy, head of Atlanta’s human resources department, who sits on all three pension boards. “That said, we also want to be thoughtful about the choices we make.”
The $587 million Georgia Firefighters Pension got a two-year head-start on Georgia’s other pensions. In 2010, lawmakers allowed the Conyers-based pension plan to become the first public pension in the state to begin dabbling in private equity, investing up to 5 percent. It has committed to invest $28 million with two private equity funds in Boston and Chicago. But those money managers have drawn only $4.7 million on that commitment.
The pension’s executive director, James Meynard, would like to be further along. But his efforts have been stymied by the new Georgia law, which defined a different limit on investments than most states use.
As a result, “we won’t be able to make another commitment probably until next year,” grumbled Maynard.”It puts us dead in the water.”
The problem, he said, is that the new law doesn’t take into account how most private equity funds operate.
Typically, private equity funds build up an investment pool by asking pensions or other investors to commit tens of millions of investment dollars in a partnership. The commitments are binding, but the investors don’t have to send money until the private-equity firm is ready to buy a stake in a start-up company or other venture.
Georgia law counts the bigger commitment figure toward the 5 percent cap, said Meynard. But most states only count the amount that’s actually invested — not the amount committed — toward the cap, said Keith Brainard, research director for the National Association of State Retirement Administrators.
“I’ve not heard of a state bumping up that soon against that limitation,” he said.
South Carolina’s state retirement system, for instance, said it commits about 150 percent more money than its investment target for private equity. It’s “a common industry practice,” the agency said, that accounts for the years-long lag time between joining a private equity pool and actually investing the money. That state has about 32 percent of its portfolio in alternative investments.
The Georgia Firefighters’ Pension Fund’s $28 million commitment is 4.8 percent of its assets, so it will be a while before it can commit $10 million or so to another fund. By the time the pension’s actual investments catch up with its commitments, said Meynard, its private equity managers will probably start winding down their investment pools and send money back to their partners.
“You’ll never get beyond about 3 percent” devoted to private equity investments, said Meynard. “It’s almost a waste of time.”