BusinessTN

Tennessee’s Consolidated Retirement System is one of the few pension funds in America that doesn’t invest in venture capital or other forms of private equity. At a time when other states are increasing their allocations to private equity, Tennessee continues to maintain an extremely conservative posture.

Admittedly, Tennessee’s pension fund has been managed very well over the years. In 2005, it received an award from the Public Pension Coordinating Council for meeting professional standards. It is, however, a very conservatively run program. Only about 50% of the portfolio is invested in equity—including real estate—compared to other states, which invest 67% and more. None of that equity allocation is directed to private equity or venture capital.

This conservative approach has limited returns in recent years. In 2005, Tennessee generated returns of just 7.26%, under the plan’s assumed rate of return of 7.5% and well below the Public Fund Index Median of 9.38%, which TCRS publishes in its annual report as a benchmark. State officials point out that this conservative approach serves the state well in inevitable economic downturns, but the fact of the matter remains that most of the nation’s pension funds are choosing to invest a small portion of their portfolios in private equity in order to generate higher financial returns.

Why does all this matter? First, the beneficiaries of the state’s pension fund would be better served over the long term by a slightly more aggressive investment approach. Second, a new policy to invest a modest amount of the state’s $27 billion pension fund in private equity and venture capital could have a demonstrably positive impact on the state’s economy.

As has been widely reported over the years, Tennessee’s entrepreneurial economy is constrained because there is very little venture capital available in the state, especially compared to the east and west coasts of our country. Pension funds are one of the largest investors in venture capital, providing billions of dollars to venture capital funds throughout America. If Tennessee’s retirement system agreed to change its asset allocation just slightly—to invest only half the national average in venture capital and private equity—it could mean more than $500 million in new capital investment for companies in our state and elsewhere across America.

As we enter the Bredesen administration’s second term, this is an issue that warrants some thoughtful consideration. If Tennessee’s retirement system does elect to begin making some modest investments in private equity, it must be done professionally and without political favoritism to any particular venture fund, in Tennessee or elsewhere. It is important to remember that Tennessee’s consolidated retirement system represents the financial future of nearly 300,000 individuals. I believe, however, that the interests of these state employees and the interests of Tennessee’s economic future would be well served by some open and honest discussion of this opportunity.