For decades, Oregon’s public pension system has been kept afloat by a gusher of income from its investments in private equity, opaque private partnerships that typically buy companies, manage them, then try to sell them at some point for big profits.
The returns have played a meaningful role in maintaining the system’s financial health, routinely outpacing other investments and keeping a funding deficit caused by misguided benefit decisions decades ago from becoming even larger than the nearly $30 billion shortfall today.
Yet in the past several years, even as the stock market has been booming, that private equity gusher has slowed to a relative trickle. That’s undermining the system’s total investment returns, causing cash flow issues and, as of July, contributing to another rise in the punishing contribution rates that government employers are required to make to the fund.
For some, the slowdown raises fundamental questions about whether the system’s distinctly aggressive investment strategy, now dominated by so-called alternative assets that lock up its cash for years at a time, is a mismatch for the demands of Oregon’s mature pension system; whether it’s too risky; or has simply run out of competitive gas because so much copy-cat money has flooded into the sector seeking premium returns.
The implications for taxpayers are meaningful, as investment income has traditionally covered 70% of the system’s benefit payments. If returns are lower, contributions from government employers will need to be higher. And contributions already eat up 27 cents on top of every payroll dollar spent by state and local governments, meaning cities, counties and the state have less money to spend on teachers, cops, firefighters, roads and bridges, libraries, mental health services, and every service that government provides.
Managers at the Oregon Treasury’s Investment Management Division remain optimistic, saying markets are cyclical, and the big payoffs from their complex bets should return. But others aren’t so sanguine and say the market is fundamentally changing, leaving less room for the big scores of the past.
Oregon could be particularly vulnerable to such a downturn because its Public Employees Retirement Fund is something of an outlier among U.S. public pension systems, a review by The Oregonian/OregonLive has found. More than 27% of Oregon’s portfolio is invested in private equity funds, above its own internal target and almost triple the 10.4% average allocation of 201 public pension funds surveyed by the National Conference on Public Employee Retirement Systems.
Add in the fund’s investments in other so-called alternative assets that aren’t publicly traded and are difficult to readily sell – real estate, hedge funds, natural resources, etc. – and they account for 60% of Oregon’s investments, also notably above Oregon’s internal target and double that of other public pension systems in the 2025 study.
A separate 2025 study of 253 state and local pension plans by the Equable Institute, a non-profit that provides pension education, found that Oregon PERS had the second highest allocation to alternatives, 2 percentage points higher than Washington’s retirement system.
Financial managers of most pensions aren’t comfortable with an investment mix like that.
According to a survey of U.S. pension fund managers from Ortec Financial B.V. earlier this year, half believed the reasonable maximum allocation to private assets was between 20% to 30% of their investment portfolios. About a third of managers were comfortable with 30% to 40%. Only a fraction said they’d be comfortable going up to 50%.
One reason for that hesitancy: Alternative assets are typically structured as limited partnerships. They can lock up investor’s money for years at a time, even a decade or more, before profit distributions come back. It’s unpredictable. And since they aren’t publicly traded, they have no easily agreed upon value in the meantime, so they aren’t readily saleable to meet cash needs.
Oregon’s $97 billion pension fund, meanwhile, is what’s called a mature system, with an aging cohort of members and a high percentage of its asset base going to pay benefits each year. That’s not inherently a problem. But it makes the system even more dependent on investment earnings to foot the benefits bill, currently $6 billion a year for some 166,000 retirees. Costs are slated to grow to $8 billion by 2033 and $10 billion a decade later.
That’s cash out the door. And absent a big slug of profits from the alternatives portfolio, and particularly private equity, Treasury investment managers have sold down their publicly traded stocks to help pay the bills and fund more alternatives investments, even at a time when stocks were enjoying a bull market. Publicly traded stocks now comprise 17.4% of the portfolio, 10 percentage points below the fund’s target and down from a recent high of nearly 31% five years ago as the fund has bulked up its commitment to alternatives.
To make ends meet, they’ve also sold a swath of private equity investments – $4.5 billion worth in recent years – at a discount to their reported value. Officials won’t say exactly what those discounts were. Most of their dealings with the funds are exempt from disclosure under the state’s public records law.
Three former chairs of the Oregon Investment Council, the five-person panel that sets investment policies for the pension fund and approves big investments, told The Oregonian/OregonLive the heavy allocation to alternatives, their flagging returns, and the liquidity problem they pose, are concerning.
Rukaiyah Adams, who chaired the council from 2017 to 2020, said during her tenure the council and state chief investment officer tried to focus on liquidity in the growing private equity portfolio to make sure the fund would have ready access to cash to meet pension demands. Today, she said the big allocation to alternative investments is a serious point of actual, not hypothetical, concern.
“This has to be dealt with directly and immediately,” said Adams, who is now chief executive of the 1803 Fund, a nonprofit focused on revitalizing Portland’s historically Black Albina neighborhood.
The current chair, Cara Samples, did not respond to requests for comment.
The Oregon Treasury said Thursday it had replaced Michael Langdon, its longtime head of private markets, who announced his resignation in December. Since January, the department has also significantly dialed back its plan for ongoing investments in private equity.
Treasury managers acknowledge the headwinds their strategy has met in recent years. But they say they’re investing over the long term and expect their strategy to pay off.
“I feel like we’ve got a pretty good portfolio right now,” said Rex Kim, chief investment officer at the Oregon Treasury.
‘What’s the advantage?’
It’s hard to overstate how deeply private equity is embedded in the culture of Oregon pension fund managers. They were pioneers nationally in 1978 when they invested $10 million with Kohlberg Kravis Roberts & Co., the first public pension fund to make such an alternative commitment. That was followed in 1981 by a $178 million investment to KKR’s buyout of Fred Meyer, a deal that delivered returns of up to 400% to investors like Oregon’s pension fund when the company was taken public again.
The state never looked back. Managers invested $1.8 billion in private equity in the 80s, $6.7 billion in the 90s, $21 billion in the aughts and nearly $26 billion the following decade. Oregon’s place in the industry became a point of pride, almost bravado on the council. The state’s retirement fund currently has more than $26 billion in such investments, comprising 27.1% of its assets.
Historically, those investments delivered big returns, typically outpacing public markets by wide, if diminishing, margins since the 1980s. Over the past 10-year period, they’ve generated annual returns of 12.7%.
But a couple things have changed, experts say. A tsunami of new money has flooded into the private equity sector, increasing competition, driving up the prices they pay for companies, and erasing some of the market inefficiencies the funds used to be able to exploit. Coupled with the big fees the fund managers charge, that has eroded the premium returns that the funds were historically able to deliver.
Oregon paid more than $600 million in fees last year to outside managers of its alternative investments, nearly half of it to private equity mangers.
Since 2022, another problem has been higher interest rates, as private equity funds rely heavily on debt to finance acquisitions and goose returns. Higher rates make buyouts more expensive and less financially viable, and companies acquired in leveraged buyouts may struggle to meet high debt payments.
Richard Solomon, a Portland certified public accountant who served on the investment council from 2004 to 2015, including three years as chair, said he questions if the tides have shifted and private equity will be a less attractive means for big windfalls going forward.
“There’s a huge number of players these days and they’re chasing smaller and smaller deals,” eliminating some of the easier gains of years’ past, he said. That makes it ever more critical that Treasury staff choose the right funds.
Solomon said he thinks it’s appropriate for Oregon to be invested in the sector, to a point.
“Should we be in it to the extent we’re in it?” he said. “That’s doubtful.”
Keith Larson, another former Oregon Investment Council chair and previous executive at Intel Capital, points to efforts by huge investment managers like Vanguard and BlackRock to push private equity into the portfolios of less sophisticated, individual investors, even into 401(k) plans, limiting the upside for pension funds like Oregon. President Trump is expected to sign an executive order in coming days directing regulators to study and possibly facilitate the move.
“Why it used to be attractive was limited access to those vehicles,” Larson said. “It was a much more inefficient marketplace. When you bring efficiency in, everything starts to revert to the mean market (returns). What’s the advantage of it if you’re in less liquid investments that is reverting to that mean?”
Groups like Divest Oregon have been raising the red flag on the pension system’s private investments for years. Their concerns are generally focused on the risk of long-term fossil fuel investments in an age of global warming. But they also extend to the fund’s overallocation to mediocre investments whose details are kept secret from PERS beneficiaries and taxpayers.
Rick Pope, a volunteer with the group, said the percentage of the pension fund invested in various forms of private assets had quadrupled in the last 20 years.
“Many peer pension funds achieve higher average returns than Oregon with little to no reliance on private equity investments,” he said, referring to recent performance.
State Treasurer Elizabeth Steiner came into office in January saying Oregon should pare back on the pension fund’s investments in fossil fuel infrastructure – some it through private investment funds – as those could decline in value because of global warming.
She supported a bill that passed this year requiring the council to analyze and manage the risks of climate change on the fund’s investments. But she opposed another that would have placed a moratorium on such investments.
She said in an interview that placing such limits on the council was inconsistent with its responsibility to maximize returns to the pension fund, and focusing on private market returns in the last few years is misleading.
“We are investing on a 40-year time horizon,” she said. “Looking at the past three years is certainly important to do, but it’s not necessarily illustrative of our overarching performance in any particular sector of our portfolio.”
Staying the course?
Oregon Treasury staff remain bullish about private equity’s future, and its ability to help the state meet its pension obligations. In fact, the agency had preexisting commitments to pump another $16.3 billion into alternative investments as of March, including $7.6 billion into private equity.
As recently as April, Treasury staff and their chief consultant, Meketa Inc., both projected that private equity would annually outperform public equity markets by 3 percentage points. That, in fact, is the council’s performance benchmark. But as of the end of May, it hasn’t hit it for the last 10 years.
Kim, the chief investment officer, said that yardstick may not be the best measure. Over the last 20 years, returns from the sector have ebbed and flowed from slightly negative to wildly positive, he said, “but generally speaking have a very high batting average” and have outperformed publicly traded U.S. stocks by 2 percentage points.
Would the board be happy with that, he asked? “I suspect the answer is yes.”
At a meeting of the investment council Wednesday, two managers from a hedge fund and private equity firm told members that markets had just gone through a 10- to 15-year period of exceptional returns, but that performance is unlikely to be repeated. Kim said that’s why he’s comfortable with the current portfolio, working with investment managers who are actively seeking out pockets of opportunity.
In the meantime, he said managers are taking steps to gradually bring the fund’s private markets exposure back in line with the state’s target by reducing its pace of investing in new partnerships, and through the sale of some of its previous investments.
“I think we’re on the right path,” he said, adding that liquidity is always a concern, but that staff and consultants regularly model the system’s cash flow. “Do we have enough liquidity to meet all our obligations? Yes.”
Other observers, both local and national, are more skeptical of the state’s overarching strategy.
“If things don’t turn around pretty quickly in that private equity ice block they’re sitting on, they’re going to be in some pretty big trouble,” countered Doug Berg, a retired information technology manager from Eugene who closely tracks the performance of the pension fund.
Others suggest chasing the status quo in private equity and other alternative assets is a loser’s game.
“None of the people I follow and respect in this area believes distributions will come back any time soon or that returns will improve,” said Richard Ennis, a longtime consultant to institutional investors and deep skeptic of the rush into alternatives.
Oregon’s projections for what those private equity investments will yield for the pension fund, he added, amount to “fanciful thinking at this point in the cycle.”
—Ted Sickinger is a reporter on the investigations team. Reach him at 503-221-8505,tsickinger@oregonian.comor@tedsickinger
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