New York City Retirement Systems considers increasing its exposure to private markets

Just as the denominator effect was causing many LPs to pull the brakes on their private markets allocations, a new piece of legislation was signed. It gave New York’s public pension funds the ability to commit more capital to the private markets (although it is as yet unclear which asset classes will be the beneficiaries).  

The legislation – signed in December by the governor of New York, Kathy Hochul – allowed New York City Retirement Systems (NYCRS) to increase investments that fall within the so-called “basket clause”. The clause, which limits an investor’s exposure to certain asset classes – including the likes of private equity, infrastructure, real estate, opportunistic fixed income, hedge funds, venture capital and some foreign equities – had sat at 25 percent since 2006.  Following the legislative change, 35 percent of a system’s assets can be deployed into investments defined by this clause – namely, private markets. 

“Since 2000, there has been a four-fold increase in the net asset value of private markets as a percentage of the leading public equity index,” according to a sponsor memo accompanying the bill. In addition, as per the MSCI All Countries World Index, more than 40 percent of the current value of the global equity market comes from foreign equity securities.

As private and global equity markets have increased in “size and importance”, the original law governing permissible types of investments for New York’s various public retirement systems “has constrained the systems’ ability to prudently diversify their portfolio through allocation to these markets”, the memo noted.

Collectively, the portfolios of the five pensions under New York City comptroller Brad Lander’s Bureau of Asset Management’s purview had a total net asset value of $247.79 billion as of March 2023, according to the comptroller’s website. Each pension – Teachers’ Retirement System of the City of New York, New York City Employees’ Retirement System (NYCERS), New York City Police Pension Fund, New York City Fire Pension Fund, and New York City Board of Education Retirement System – has its own board of trustees, which each works with the Bureau and the board’s consultants to make decisions on the five systems’ asset allocations. 

“The hope and expectation [is] that the private assets will benefit from this [basket clause] increase”

Steven Meier

Steven Meier, chief investment officer of NYCRS and deputy comptroller for asset management, tells Private Equity International that the Bureau of Asset Management is going through a strategic asset allocation review. It began on 1 January, and will give recommendations to each of the five boards of the pensions. The plans have their own risk tolerances, investment policy statements and strategic asset allocation processes. The Bureau has “the hope and expectation of getting board approval and finality by October”. With this approval, the team and the pensions it oversees can incorporate any changes to pacing plans for “2024 and beyond, with the hope and expectation that the private assets will benefit from this increase”, Meier says.

The investment executive – who has more than three decades of experience in both the public and private sectors, and was elevated to his current role in August 2022 – speaks cautiously about asset class deployment in a 30-minute interview with PEI. Following the conversation, Meier reiterated in a statement that the team does not want to “pre-empt the respective NYC boards’ decisions around the strategic asset allocation review, which is currently underway”.

Meier says he anticipates “there will be an increased allocation – again, subject to trustee approval – into those key asset classes”. His anticipation is that one of those benefactors will be private equity. 

Growing in importance

Private equity is “very important” to NYCRS, Meier says. “It’s a key strategic asset, it’s a high-performing asset, [and] it’s got a [more] differentiated return stream than public equity.”

In total, NYCRS managed $23.51 billion of private equity NAV as of 31 March. Its five pension plans have target allocations of anywhere between 7 and 9 percent, Meier says, although the systems do not publicly disclose these targets. The pension plans are currently “a little higher than that” given the denominator effect. The asset class is “important, and I believe it’s going to grow in importance”, he adds.  

When asked whether the system will look to back more managers, make bigger commitments to PE or take a broader geographical approach, Meier said in a statement following the interview that, should the system’s target to private equity increase, the Bureau has “a very strong roster of existing managers where we can scale our commitments”.

“We do not anticipate a change to the target asset allocation in PE to meaningfully impact how we deploy capital, as we are disciplined around consistent vintage year deployment and are a long-term, patient investor,” Meier says.  

Although private equity doesn’t dominate NYCRS’ pension systems’ assets under management, “it dominates my time”, Meier says. “I probably spend 65 percent to 70 percent of my time just on private market opportunities.”

The Bureau now counts four people on its private equity team, and is “actively looking to grow the team with both senior and mid-level professionals”, Meier says in the follow-up statement. NYCRS’ head of private equity, Eneasz Kądziela, was promoted to deputy chief investment officer late last year. He was picked to head up NYCRS’ private equity allocations in 2021, following the departure of David Enriquez, who joined the pension system in 2016. 

Given the size and scale of NYCRS’ private markets portfolio, there is a high volume of investment opportunities being reviewed, Meier adds. “Even if we pass on a re-up of an existing manager, we want to be sure that no stone is unturned and that we are making the best investment decision for the portfolio.”

Value-add a must

NYCRS has a similar playbook to many of its large institutional peers when it comes to the managers it backs. “We look to those managers that can deliver performance through improvement in operations,” Meier explains. “We’re not looking for managers who simply buy, leverage up and then try to expand the multiple.”

The Bureau is looking for managers with expertise, a consistent strategy, and those that have a commitment to resources to support that strategy. It is also looking for GPs that have more of a strategic approach, “whether it’s buyout or growth equity or secondaries”, Meier adds. “We tend to work with firms that have a long-time, long-term track record over decades that we can understand and benefit from.” 

Where exceptions could be made to the latter point is via its emerging managers programme, facilitated by Neuberger Berman. Since 2012, the pension system has run a direct emerging managers programme that commits between $25 million and $75 million to US or European GPs raising funds of less than $1 billion. 

“It’s something we’re absolutely committed to,” Meier says. “We’re looking to expand, we’re looking to improve our performance there as well – and not just emerging managers, but MWBE [minority- and women-owned business enterprises] as well, as part of that emerging manager cycle.”

Typically, its emerging manager programme has higher performance compared with its overall private equity portfolio. “Candidly, we don’t give up anything on returns in emerging managers,” Meier adds.  Each of NYCRS’ private equity emerging manager programmes – its 2012, 2015 and 2019 editions – individually and combined have generated in excess of a 20 percent net IRR since inception, Meier says. 

The institution’s co-investment programme is also going “exceptionally well” when it comes to the opportunity set that’s coming across the Bureau desk, Meier says. The strategy launched in June 2020 and was understood to have an initial $500 million to deploy via a separately managed account over the subsequent two to four years, Private Equity International reported at the time.

The Bureau has been “pleasantly surprised at how much new product will come out of our existing managers”, Meier says. Its consultant for the strategy, HarbourVest Partners, also “has a very wide network of GPs, so we’re able to diversify into other areas through co-investment as well”. 

25%

The former basket clause cap on New York investors’ exposure to certain asset classes

35%

The new basket clause cap,
per legislation signed in
December 2022

$7.99bn

New York City Employees’ Retirement System’s exposure to private equity as of end December

“The economics are great for us, so it’s been a win for us. We’re very happy with the way the programme is going… and it’s really helped us with our existing GPs to actually improve the relationship with [them],” Meier says. “It’s growing. The expectation is it’ll grow even further.”

Meier adds that, while it is officially “still too early to judge” the performance of the programme, it has been “very active in deploying capital alongside our core managers, and we are pleased with the relationship with our partner”. 

Space in secondaries

NYCRS also has a secondaries programme in place – an area in which the system has been investing since 2002, Meier says. Although allocations vary by pension fund, its long-term targets to the secondaries strategy range from 10 to 20 percent of its total private equity portfolio. 

Historically, the programme has mostly backed LP-led strategies. As the opportunity set in secondaries has shifted towards GP-led transactions, NYCRS has participated in deals in this space as well. The Bureau will “look to do more in that part of the market going forward”, Meier says. 

The Bureau of Asset Management sees secondaries as a space where there is great opportunity to deploy capital in the next 12 to 18 months, Meier says. He adds that the system is open-minded to different opportunities in the segment where there may be uncorrelated returns compared with the rest of the NYCRS portfolio. 

NYCRS is investing in secondaries “really to increase and diversify our holdings”, Meier explains. “We have an outside manager that is looking to add to our existing positions. [We are also looking to] add other secondary opportunities that may be cheap in the market, but are of high-quartile quality that meet our requirements.”

A strength NYCRS has is its ability to leverage its size, Meier says. “I really believe that size is an advantage. That may not be necessarily the case in the public markets where we’re big… but in the private markets, it 100 percent is actively managed.”

The Bureau is able to negotiate “better terms with the very best managers out there… and of course, negotiate better economics, given we typically always meet the minimal hurdles for price breaks if they apply”.

New managers

While many LPs are pounding the pavement in the secondaries market seeking to offload positions in order to rectify their overweight allocations to private markets, NYCRS is able to sit this round of market disruption out. 

“We’re actually not a seller in the market. We don’t need to be,” Meier says. “We’ve got a high-quality portfolio… with a 7 to 9 percent current allocation. We’re not constrained – we have more than enough liquidity.”

Although NYCRS has been focused on re-ups so far this year, Meier describes the current market as a “buyers’ market”. He adds: “It’s a good time to be a limited partner for both the Bureau of Asset Management and other LPs out there.” 

The Bureau has had a number of “really high-quality GPs” reaching out to it recently as managers battle to find new investors to make up for smaller re-up ticket sizes. NYCERS –  which has a 9 percent allocation to the asset class, or nearly $8 billion, according to PEI’s 2023 GI 100 ranking (see p. 24) –  has recently backed the likes of Hg’s mid-cap vehicle, Hg Genesis 10, with a $107 million commitment; Platinum Equity’s latest flagship Platinum Equity Capital Partners VI with a $156 million commitment; and Leonard Green & Partners’ Green Equity Investors IX, which received $120 million from the pension.  

The Bureau, which is “trying to be very smart about how we deploy our capital”, has made some commitments to new managers that have approached it during the fundraising crunch. “We’ve been selective, we’ve been prudent, but again, we think that the current environment is a very good environment for us as an LP. We also have the benefit of potentially the wind at our back.”

When it comes to valuations, Meier says its GPs have been conservative in marking up their assets “given the quality of our managers”. The day of PEI’s interview with Meier, he had been reviewing fourth-quarter private equity valuations with the Bureau’s risk management team. “They’re close to flat, to down slightly,” he says, “which is not inconsistent from what we would expect to see given the quality of the assets.”

NYCRS’ capital is patient, however, so it doesn’t need managers to “force exits in an environment that doesn’t really support that”. 

At a time when private equity managers are being hit from all sides by fundraising difficulties, the Bureau’s  bullish views on private capital – coupled with the fact it now has more capital unlocked to deploy into asset classes like private equity – will come as welcome news. 

Still, the bar the Bureau has set for the managers it will consider backing remains very high. As NYCRS hashes out which asset classes will get more of its cash, private equity professionals should get ready for some stiff competition.

Assets under consideration

Private equity is not the only asset class NYCRS is looking to as it weighs up increasing its private markets exposure 

New York City Retirement Systems’ increase to its basket clause cap is not constrained to private equity. Steven Meier tells Private Equity International that its strategic asset allocation review “could entail a whole bunch of different things”, not limited to private markets alone. Rather, the pensions system is “looking at our non-US equities as a source of using our basket”. 

When the cap for basket clause allocations stood at 25 percent, NYCRS was “operating under a constrained opportunity set”, Meier says. The recent increase to 35 percent “frees us up to think differently”. 

With the caveat that he is hesitant to prejudge the outcome of the review, Meier expects NYCRS will see increases in private equity as well as other asset classes, such as private credit and infrastructure. He also anticipates there may be changes to allocations in hedge funds – where some of its pension funds, but not all, invest – as well as venture capital. 

When it comes to venture capital, NYCRS hasn’t had much of a presence. “That’s something [that will] probably be looked at a little more closely, but we’re always open-minded to new opportunities in the marketplace.” 

Private credit is an area where Meier is particularly bullish. “I think it’s cheap and it’s an exciting asset class,” he says, adding that the Bureau of Asset Management sees an “enormous opportunity” with base rates rising and credit spreads widening. Meier believes the regional bank disruption in the US – with the first casualty, Silicon Valley Bank, going under in March – will continue to curb the ability to access credit. Dealmakers are using “a lot less credit right now because it’s expensive” but where they are tapping the debt markets, “we want to participate in that”. 

NYCRS pensions make commitments to direct lending strategies via GPs, and won’t look to underwrite credits internally, he says. “I think it’s an opportunity that will probably be there for the next 10 years… It’s an area that we’re very happy to be involved in at this point.”