NYCRS’ co-investment programme comes to fruition

The $261bn New York City Retirement Systems has become the latest institutional investor ready to partner with sponsors on direct private equity deals.

There’s a new direct investing behemoth in town and it wants to be the partner to best-in-class GPs.

Five years after hiring a Rothschild banker to launch a private equity co-investment strategy, New York City Retirement Systems’ programme is officially up and running. The programme launched in June and is understood to have an initial $500 million to deploy via a separately managed account over two to four years.

“This programme aims to address the white space in our private equity portfolio by harvesting co-investment dealflow from the systems’ primary managers that we’re not able to pursue at the moment,” Katja Salovaara, senior investment officer at NYCRS, told Private Equity International.

It aims to enhance NYCRS’ private equity funds portfolio by providing “strategic learning benefits” to the Bureau of Asset Management – the department that oversees investments for New York City’s five main public pension plans – by increasing market knowledge, insight into specific managers and assisting its primary fund selection process, Salovaara added.

“It also aims to level the playing field with our peers because co-investing is a natural part of a best-in-class private equity portfolio today,” she said.

NYCRS, which is the unofficial name for the city’s five main public pension systems, selected HarbourVest Partners for a mandate to help invest the programme. The programme’s structure is a hybrid partnership model in which HarbourVest has discretion to deploy co-investment capital alongside GPs. Staff from NYCRS will also play an integral role in investing the programme.

“We settled on this hybrid partnership model where our partner [HarbourVest] acts as an extension of our private equity team and has investment discretion,” Salovaara said. “Our team is integrated into their process and that’s where we can gain insights and learning benefits.”

The programme will focus on deploying co-investment capital with existing GPs and has some flexibility to co-invest with sponsors the pension does not have existing relationships with, Salovaara said.

NYCRS has active relationships with around 40 GPs, she added. It is understood the pension system’s average annual commitment to private equity funds has been roughly $3 billion in recent years.

The programme will be a direct investing strategy and will not commit to co-investment funds, according to Salovaara. It will be sector-agnostic, and will largely reflect the system’s primary fund portfolio by region with a main focus on the US and Europe, and some exposure to Asia-Pacific.

In setting up the programme, NYCRS conducted in-depth research which involved educating both its internal staff and trustees. The pension conducted a “disciplined selection” process to find the best possible partner, Salovaara added.

Salovaara joined the pension in 2019 from Finnish pension fund Ilmarinen Mutual Pension Insurance Company where she was a senior portfolio manager. She joined alongside Cristian Norambuena, who was previously head of strategy and alternative investments at Chile’s AFP Capital.

In 2016, NYCRS hired David Enriquez, an M&A banker from Rothschild, to build a private equity co-investment programme. In a 2019 interview with PEI, Enriquez said the pension system was studying the market opportunity to assess the potential investment approaches and structures that are available to limited partners. This ranged from executing a programme in house, to outsourcing the programme, to an “in-between approach” where LPs work together with a partner, he said.

Enriquez has since left the pension to return to Rothschild, as PEI reported last month. It is unclear who will replace him as NYCRS’ head of private equity.

NYCRS had $260.92 billion in assets under management as of April and is the fourth-largest US public pension, according to its website. It comprises Teachers’ Retirement System of the City of New York, New York City Employees’ Retirement System, New York City Police Pension FundNew York City Fire Pension Fund and the New York City Board of Education Retirement System.

Asked what the long-term plan of the co-investment programme is, Salovaara said it was not to compete with NYCRS’ partners.

“It’s a programme vision of long-term successful partnerships with our managers where we invest in funds and co-invest with the managers,” she said. “The intention is not to start competing in any way with our managers by having a more enhanced, direct capability down the line.”