NYC to make $2.5bn in annual commitments

CIO Larry Schloss (pictured) and private equity head Barry Miller are working to re-position the $120bn system's programme to commit more money to fewer managers.

New York City is looking for a few good private equity managers.

The $120 billion pension system wants to invest $2.5 billion annually on commitments for the next several years, allocating more capital to fewer managers, and boosting its exposure to Western Europe.

After spending several months analysing its private equity programme, top pension officials determined the system had committed to too many managers in 2006, 2007 and 2008. The system has committed about $13 billion to 110 managers, averaging less than $100 million per fund, according to Larry Schloss, chief investment officer in the Office of City Comptroller John Liu. Schloss, and the system’s head of private equity Barry Miller, spoke to Private Equity International in a recent interview.

The officials’ goal, as discussed with the system’s boards of trustees, is to have a “reinvigorated” private equity

Barry
Miller

programme in three years. One that will be heavily weighted toward first quartile managers, top emerging managers and some European funds.

“We have too many managers and not enough money with top managers,” Schloss said.

We have too many managers and not enough money with top managers.

Larry Schloss

As part of the “re-positioning” of its private equity portfolio, the system is hiring a broker to run a series of secondary sales that could include up to $2 billion worth of LP interests. The system will not be a “distressed seller”, Miller said, and will only transact if it gets the right price for assets.

“There’s a diverse group of buyers out there and an enormous amount of demand,” Miller said.

In actively managing its portfolio through the secondary market, New York City is joining several other public pensions in the US and Canada that have sold large portfolios in the past year. The California Public Employees’ Retirement System has sold more than $1 billion worth of private equity interests and North Carolina sold close to $1 billion.

Others public systems in New Jersey, New Mexico and Ohio have been considering or have sold stakes on the secondary market.

Larry Schloss

The system’s actual allocation to private equity stands at around 6.5 percent, which would drop after a large secondary sale. New York City wants to then boost the allocation target to the asset class to about 7 percent – the sale would free up space for the system to make new commitments.

The pension system wants to target first quartile firms, though not necessarily large firms. The system is open to smaller and emerging managers as well, they said. In fact, New York City has about $600 million committed to four emerging manager fund of funds.

One thing the system is not considering in a significant way is emerging markets. Exposure to the strategy comes

Emerging markets open and close pretty quickly … which might not be ideal for private equity.

Larry Schloss

through the system’s relationship with large, internationally focused funds, but there are no plans to individually target local developing market managers, according to Schloss.

“Emerging markets open and close pretty quickly … which might not be ideal for private equity,” he said. “We are however, increasing our exposure to emerging market public equities from about 3 percent to 7 percent  varying by system and are in the final stages of a manager RFP which will expand our group of emerging market managers.”

The city system has already committed a large portion of its 2011 $2.5 billion goal, the officials said, pledging to five managers this year, including two emerging managers. As an example of the system’s philosophy, one of the commitments was to a “new relationship” totaling $325 million.

While the officials declined to give specific details about the commitments, the individual pension funds that make up the city system have made public the last nine months of commitment activity.

For example, the city's Teachers' pension fund, which is advised by Hamilton Lane, committed $280 million to EQT Partners, BC Partners, AXA Secondary Fund and Pegasus Partners in the last nine months. The city's firefighters' pension committed $85 million in the past nine months to Wellspring Capital Management, The Blackstone Group, Ampersand Capital Partners and Black Diamond Capital Management.

Without giving specifics, the officials said the system has a robust pipeline of firms to which they are considering commitments. They are also interested in meeting quality managers that aren’t yet in fundraising, but will be in a few years, the officials said.