Talk about the courage of your convictions.

For years the Washington State Investment Board has been a daring, cutting-edge investor, risking more of its now–$65.8 billion pension portfolio on private equity than any major state plan. Washington State got in the game early, with Kohlberg Kravis Roberts & Co.’s first fund in 1982, and as the returns poured in, the state pushed its target allocation ever higher — to 17 percent as of last year.

Then came the credit crunch. Suddenly, after years of riding high as one record-size leveraged buyout followed another, the private equity market tumbled. Deal terms stiffened, lenders balked, and credit all but evaporated; $154 billion worth of buyouts were pulled during 2007, up from $112 billion in 2006, according to Dealogic. KKR and its rivals took turns warning investors that they could expect lower returns in the future.

So what did...