Against Grain, Pennsylvania To Slash PE Allocation

The change, which is scheduled to take place over 10 years, will sharply reduce the size of its private equity program, which at the end of 2011 amounted to $7.2 billion.

To reach its goal, PSERS said it would commit no more than $500 million a year to alternative investments.

“We will implement the new allocation in a deliberate, systematic way over time,” said Anthony Clark, PSERS’s chief investment officer, in a statement. “This work continues the fund’s ongoing shift from a legacy, endowment-like model toward a more liquid, total return strategy.”

Private equity was not a strong performer for PSERS in the fiscal year that  ended March 31. In 2011-2012, private equity returned just 3.1 percent, compared to global stocks, which returned 13.3 percent, and U.S. stocks, which returned 13.1 percent. The pension’s overall return was 6 percent.

PSERS currently has one of the nation’s largest allocations to alternative investments among pensions. When one includes hedge funds and real assets, such as forest land and private energy partnerships, the total allocation to alternative investments rises to 50 percent of its portfolio. According to the Wilshire Trust Universe Comparison Service, the average allocation by large pensions to alternative investments, such as private equity, venture capital, hedge funds and real estate, was just 19 percent, as of last September.

That itself is a substantial rise from the 10.7 percent average in 2007, according to Wilshire. Many pensions, especially those that have substantial unfunded liabilities, have embraced alternative investments with gusto, hoping to invest their way, at least in part, to a better level of funding during an era of tight state and municipal budgets.

PSERS has come under criticism for its very large alternative allocation, especially its effect on returns over the last five years. During that period, which coincided with the global financial crisis, PSERS returned an average of 3.6 percent, below the level of other pensions in states such as Georgia , which stuck mainly to public markets. An article from April in the New York Times pointed out that PSERS paid out $1.35 billion in fees to general partners during the last five years, an amount far greater than the fees paid to investment managers by Georgia’s pensions.

In addition to reducing the overall amount of private equity capital, PSERS also intends to sharply reduce the number of private equity relationships. At the end of 2011, PSERS had 149 general partner relationships, a number it plans to reduce to just 40 to 50 managers over the next 10 years. Moreover, the pension said it would now emphasize separate managed accounts, rather than conventional private equity funds, which carry higher fees and offer less control.

But in a move that highlighted PSERS continued commitment to private equity over the long term, it announced that it was committing $125 million to two private equity funds this month. AXA Private Equity, which just closed its AXA Secondary Fund V LP with $7.1 billion in commitments, received $75 million from PSERS.  Meanwhile, the pension committed $50 million to Asia Alternatives Capital Partners III LP, an Asia-focused fund of funds.