NYC pensions post highest-ever private equity returns

Five New York City retirement funds generated private equity net internal rates of return in excess of 10 percent in the third quarter of last year.

This is the first time the systems have surpassed the 10 percent mark since they began investing in the asset class in the 1990s.

“That is a strong number and it’s the first time we have been there,” Alex Doñé, chief investment officer of the Bureau of Asset Management, which manages the five New York City funds, said at a 20 March common investment meeting.

The five pension systems – New York City Employees’ Retirement System (NYCERS), Teachers’ Retirement System of the City of New York (TRS), New York City Police Pension Fund (Police), the New York City Fire Pension Fund (Fire) and the New York City Board of Education Retirement System (BERS) – together manage almost $187 billion in investments. The combined private equity allocation is $12.76 billion, equivalent to 6 percent of the total assets.

The systems have a combined $3.52 billion invested in funds of over $3 billion. This “large buyouts” category was the strongest performer for three of the five pension systems.

Since their inception, Fire’s $229.6 million large buyouts portfolio has generated the highest IRR at 24.5 percent; Police’s $574 million large buyouts allocation has generated 23.2 percent; and BERS’s $114 million large buyouts holdings have generated 20.63 percent as of 30 September.

For NYCERS and TRS, large buyouts returns were second only to special situations.

But the New York pension systems’ overall private equity portfolio continues to lag behind its public market equivalent (PME) benchmark, which is the Russell 3000 plus an illiquidity premium of 300 basis points, according to a common investment meeting presentation. This was “a tough PME to beat” given recent public markets performance, Doñé said.

The drag was also partly due to the pre-2011 legacy portfolio, he added. In 2011, the pension systems overhauled their private equity portfolios, hired new advisors and reduced the number of GP relationships.

The five systems consistently outperformed in vintages post-2011, except for 2015, the presentation said.

“A couple of managers in [the 2015] vintage in the portfolio are off to a slow start and this led to under-performance versus the PME,” Doñé said.

Two of those managers were EQT Partners and Warburg Pincus. EQT’s Fund VII closed at €6.75 billion and Warburg’s Fund XII closed at $13.4 billion in 2015.

“These funds have been slower out of the gate, but it is very early in the life of these funds and we have expectations they will return strong absolute and relative returns to the public market equivalent,” Doñé explained.