🔒State pension fund eyes $145M bet on CT Inc.

Connecticut's pension fund is joining a number of other states in placing bets on in-state businesses, as part of an effort to jump-start the economy and diversify its investment portfolio.

Over the next four years, leaders of the Connecticut Retirement Plans and Trust Funds (CRPTF) hope to invest as much as $145 million in Connecticut middle-market loans and private equity and venture financing.

The initiative would quicken the pace and scope of the pension fund's Connecticut investments — which so far have included a modest amount of private equity bets — and represents the first time the public retirement system has dipped its toe directly into venture capital and middle-market lending in the state.

Such in-state investments, however, are not entirely unique. Other state pension funds, including those in California, Colorado, and New York, have encouraged, or ramped up, investments within their own borders recently.

“Interest in using pension fund assets to promote state-based economic development has been going on for decades,” said Keith Brainard, research director for the National Association of Retirement Administrators, who noted that systems' fiduciary obligations are still to plan participants.

State Treasurer Denise L. Nappier, who heads the $29.4 billion CRPTF — which serves 194,000 state and municipal employees, teachers, police, firefighters, judges, and other public servants — said in an interview that there are two strategies at work.

First, she and her team of advisers think Connecticut contains some smart plays.

“We're saying that, based on our rigorous due diligence, we know that we can make prudent investments in Connecticut,” Nappier said, adding that the new initiative is not a mandate; CRPTF will only invest in what it views as profitable opportunities.

Investments in area companies will presumably benefit the state's economy as well, Nappier said. Though secondary to CRPTF's primary objective of earning investment returns, the financial health of the state is linked to the health of its pension system.

That's because the state is required to contribute more than $1 billion a year to the pension fund over the next 15 years; a healthier economy, the thinking goes, will bring more tax receipts, putting government in the best possible position to make those payments, Nappier said.

Though it has performed well over the last decade — posting returns at or above benchmark rates — Connecticut's pension system could still use a boost. The state has the highest personal income in the country, but also one of the largest unfunded pension liabilities per capita, according to the nonpartisan, nonprofit research group State Budget Solutions.

The teachers' retirement fund — the largest in the CRPTF — had an unfunded liability of $2.43 billion as of June 2014, according to the state's actuarial consultant, while the state employees' retirement system's unfunded liability stood at $14.92 billion.

The blame for the unfunded liabilities rests mainly on state government, which has struggled over the years to fully fund its promises to state employees in the face of budget deficits, a growing number of government retirees, and rising healthcare costs.

Last year, the teacher's and state employees' retirement funds each returned around 15.6 percent. Officials hope the Connecticut investments can ramp up as soon as possible.

Terrence Purcell, CRPTF's principal investment officer for alternative investments and private equity, said he expects to hear deal presentations soon from fund managers selected for the program, including Westport's Balance Point Capital Partners, New York's J.P. Morgan Private Equity Group, and West Hartford's Fairview Capital Partners.

Purcell estimated there are more than 3,000 Connecticut companies with revenue between $5 million and $50 million, which CRPTF will be targeting.

Expanding on CT Inc. program

Since 1999, private equity fund managers hired by Connecticut's pension fund have committed $1.69 billion to Connecticut-based investments, according to figures provided by the Treasurer's office. Of that amount, the pension fund itself has kicked in $78 million alongside its partners' bets.

The $1.69 billion figure doesn't include the value of stocks, bonds, real estate, and various other Connecticut investments the system may hold at any given time.

The value of the overall Connecticut private equity investments, before tax and expense, has more than doubled over the past 15 years, the Treasurer said.

Though officials view that as a positive sign for making more in-state deals, Nappier's office could not provide the exact performance of the Connecticut private equity bets. That's because, in many instances, details of underlying investments made by its fund managers are proprietary and exempt from disclosure. And CRPTF has also not tracked underlying cashflows in those investments, instead opting to track managers' overall performance.

But under the new initiative, the pension fund will track investments made in Connecticut companies, Nappier said.

Thought most details regarding CRPTF's previous Connecticut investments are kept secret, officials were able to disclose some examples.

Last year, New Canaan-based RFE Investment Partners, a fund manager in which the retirement system has invested a total of $110 million, acquired Newington-based PCX Aerostructures for $62 million.

The pension fund is also a limited partner in a buyout fund that acquired Amerifit Nutrition in Cromwell in 2005 for $42.5 million.

Support from major stakeholder

Nappier's initiative has the support of one of the CRPTF's biggest stakeholders — public employees, according to Peter Thor, director of policy of planning for AFSCME Council 4, which represents more than 16,000 active Connecticut government employees. Thor is a member of the state's Investment Advisory Committee, which reviews CRPTF's investment decisions.

The $145 million initiative is relatively small compared to the system's overall portfolio, Thor said. He also thinks Nappier has proven her financial acumen, as evidenced by the system's investment returns during her 15-year tenure.

“This is a small element in the portfolio to stimulate Connecticut business, which produces Connecticut jobs,” Thor said.