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State Pension Fund Will Invest Directly : CalPERS: Venture will put $250 million in partnership with gas distributor. The goal is to eliminate middle-man fees.


SACRAMENTO — Managers of the $75-billion pension fund for California public employees agreed Wednesday to invest $250 million in a private partnership with natural gas giant Enron Corp.--the first such direct investment by a pension fund.

The California Public Employee Retirement System said it hopes that up to 3% of its portfolio will eventually be made up of such private placements, which bypass investment banking and avoid huge fees.

The move by the biggest and most sophisticated of the nation's public pension funds could trigger similar investment strategies among other funds and change the way many companies raise money.

"Time will tell, but there are plenty of signs that other funds are looking at similar investments," said Jed Maxwell, the fund's principal investment officer.

But brokerage analyst Philip Zahn of Duff & Phelps in Chicago said most pension funds are "probably too conservative and don't have the expertise" for the practice to become widespread. He added that some investment banking firms are setting up their own units to negotiate private-market deals, rather than be cut out of the action.

Carol Coale--a natural gas analyst in Houston for Howard, Weil, Labouisse, Friedrichs--described Enron as an innovative player in the natural gas business, as is the California system in the pension fund business.

"Enron today is being rewarded for its forward thinking," Coale said. She added that Wednesday's $2.375-a-share drop in the price of Enron stock on the New York Stock Exchange was just a correction of the previous day's $3 surge. The stock closed at $65.875 on Wednesday.

Led by California's, public pension funds have become a large and aggressive force in the nation's investment community.

Typical pension fund investments are in the stocks, bonds and real estate mass-marketed to them by brokerage firms. Fees typically range from 2% to 5%, or up to $12.5 million for a transaction the size of the Enron partnership.

Maxwell said that rather than be "supervised by Wall Street interests," the pension fund instructed Pacific Corporate Group, a San Diego consulting firm, to begin seeking direct investments. The firm approached Enron a year ago.

"CalPERS is looking for ways to position itself to get compensated for its uniqueness and size," said Chris Bower, chief executive of Pacific Corporate, specialists in finding private market investments for its clients.

The fund expects a minimum rate of return of 15%, analysts said, through investments in unregulated gas pipelines, gas storage projects, natural gas reserves and related opportunities. The target rate of return for the portfolio is 13% a year, though in recent years its performance has been below that.

The retirement fund has agreed to invest $250 million over three years in a 50-50 limited partnership with a unit of Enron Gas Services Corp., which will contribute stock. It will operate for at least nine years.

To limit risk, the state fund will get more than half the partnership's profit if the returns fall short of 15%. If the returns exceed 15%, Enron will get more than half.

Enron, based in Houston, has $11 billion in assets, including 44,000 miles of natural gas transmission lines and 80% of Enron Oil & Gas Co., a large independent producer of natural gas. Enron Gas Services, the general partner with the state system, claims to be the largest buyer and seller of natural gas in North America.

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