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How Oregon Investment Council branched out in agri

Last week, OIC met to decide whether to add two managers to its alternatives portfolio. As the pension looks to build out the strategy, we assess the role played by timberland and agri in the overall scheme.

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Last week, OIC met to decide whether to add two managers to its alternatives portfolio. As the pension looks to build out the strategy, we assess the role played by timberland and agri in the overall scheme.

The alternatives strategy of the Oregon Investment Council, which invests on behalf of the $69 billion Oregon Public Employees Retirement Fund, is not old.

It was created in 2011, with 5 percent of the portfolio initially earmarked to the portfolio, which was to comprise 75 percent of “real assets” (defined as illiquid, such as timberland and agriculture) and 25 percent of “diversifying strategies” (synonymous with liquid alternatives).

After an initial few years, OIC decided to get bolder, boosting its alternatives allocation twice. In 2013, the target portfolio share was doubled, to 10 percent; in 2015, diversifying strategies’ allocation was raised to 5 percent, thereby taking the overall alternatives share to 12.5 percent. The real assets/diversifying strategy target mix now stands at 60/40 percent.

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Agriculture and timberland have been an integral part of OIC’s efforts to boost the strategy. Both asset classes now represent about 10 percent of the alternatives bucket at large – an exposure acquired steadily through commitments to blue-chip specialists.

OIC wrote fairly big checks straight off. Its first pledge, of $50 million, went to Brookfield Timberlands Fund V, a $1 billion vehicle closed in 2013. It followed up two years later by a $100 million investment in Brookfield Agriculture Fund II. It is only when dealing with Brookfield for the third time that OIC considered investing with the Canadian manager’s infrastructure franchise, even though the latter was a more established asset class.

In 2015, the pension also diversified its manager risk by pledging $200 million to Twin Creeks Timber. The following year proved to be a bumper one. In September 2016, it invested $100 million with Homestead Capital USA Farmland Fund II. The move epitomized the pension’s approach to agriculture: after getting acquainted with the manager in its debut years, it pushed the button when it felt at ease with what the team had already demonstrated.

“Homestead was a firm that we got to know extensively during their first fundraise, so when it came to their second fund they had started to prove the model,” senior alternatives investment officer Ben Mahon told Agri Investor earlier this year.

A second fund by OIC in 2016 was Tillridge II Global Agribusiness Partners, to which it committed $100 million. The first drawdown happened in January. The vehicle had raised $375 million out of a $750 million target in March.

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As far as return expectations are concerned, OIC is quite conservative. Last February, Mahon said the pension did not have targets for individual alternatives strategies, beyond a CPI + 4 percent benchmark for the overall bucket.

But earlier documents suggest otherwise. In 2013, when the strategy was launched, OIC was aiming for total net returns of 5 to 12 percent on water, agriculture and timberland investments, “depending on stage and leverage.”

The institution has long been concerned about the lack of transactions and experienced managers, something it highlighted in its review of the strategy early on. These worries have not disappeared but Mahon recently sought to be less alarmist than OIC used to be.

“Ag and timber requires more work [than energy] so we’ve had to be more creative, investing earlier in the life cycle of funds or targeting non-traditional vehicles and structures. We’re a long-term investor, so if we think about hitting our target allocation over a decade, it’s certainly achievable,” he told Agri Investor.

Lean but keen

This note of optimism explains why the pension is redoubling efforts to grow alternatives at large. Last month, it said it would hire three new investment managers within the next two years to look after the strategy, as part of 27 new recruits to join the investment division.

While the move aims to meet the pension’s ambitious alternatives allocation target – it needs to more than double from its current 6 percent to the stated 12.5 percent objective – OIC is keen to emphasize than it remains a nimbler operation than its peers.

“We’re not moving in the direction of California,” said a spokesman last month, referring a push by the California Public Employees’ Retirement System and the California State Teachers’ Retirement System to increase direct investments in private equity. “We’re still a pretty lean operation.”