The South Carolina Retirement System recently announced plans to establish an independent firm to oversee the fund's private equity investments. The push for an in-house investment model comes as pensions across the US look to increase transparency and reduce costly fees paid to private equity firms.
In addition to approving the creation of the external management company, known as Devco, the pension has also agreed to set aside $15 million as start-up funding for the business.
South Carolina had originally anticipated creating Devco as early as 1 October, but Governor Mark Sanford and a number of top state executives requested to delay development of the firm to allow for more time to review the proposal.
The state's $25 billion pension would be the first American pension to cut out the middleman by creating its own investment firm, Investment Commission chairman Allen Gillespie told Pensions & Investments last month. Canadian pensions such as the Ontario Teachers' Pension Plan and the Canada Pension Plan Investment Board, however, have been investing directly for years.
At the Milken Institute Global Conference in Los Angeles last spring, vice president of corporate development at the Ontario Municipal Employees' Retirement System Philip Haggerty told a panel that pensions in the US could benefit from direct investing, noting that Canadian pension systems had recorded annual returns of 5.3 percent over the past 10 years – compared to 3.2 percent for similar sized US pensions. “It's now possible for us to actively promote the direct investment model,” he said. “But it's going to take a long time for a CalPERS or a CalSTRS or a Washington State to move in that direction.”
Still, limited partners in the US have been reassessing their private equity programmes and expressing a desire for specialised direct investment accounts that do not feature the fee structures typical of traditional private equity partnerships for the past couple years. In CalPERS' Alternative Investment Management (AIM) programme review this February, the pension said it was planning to create “unique structures with select general partners” that charge lower fees and offer more customised portfolios. New Jersey's $65 billion pension, for example, has eight separate accounts with various managers targeting both funds and direct investments.
South Carolina currently has a separately managed account with Apollo called the Apollo Palmetto Strategic Partnership. The account totals $759 million, including $750 million from the pension and $9 million from the firm. As of 30 June, Palmetto had committed more than $399 million to investments “primarily in our European non-performing loan fund, our private equity funds and SVF”, the firm said.
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