The Orange County Employees Retirement System has selected Pantheon Ventures to manage a new fund of funds platform that will allow multiple public pensions to invest in private equity, according to a statement from the system’s board meeting Wednesday.
The platform will offer a flexible private equity portfolio structure for smaller pensions and newer investors in the asset class and a more customised portfolio for larger pensions. Pantheon's proposed fees will reduce fund of funds investment management fees by roughly 50 percent, the statement said, though the total level of savings is dependent on how much OCERS and other pension systems commit to Pantheon each year. OCERS plans to commit between $50 million and $100 million annually to the fund.
“We are delighted to see such positive results from this innovative 'bundled' procurement process, and will look forward to reviewing final documentation in the next month or so,” Chuck Packard, chair of the OCERS board investment committee, said in the statement. “Their offer is a game-changer for the industry.”
“We have really cut out the J-curve drag from up-front fees on idle capital here,” said Girard Miller, OCERS’ chief investment officer, in the statement. Miller is willing to fund Pantheon a full $100 million annually for three consecutive years if it can be accommodated “efficiently and prudently” in the fund, according to the statement.
A selection team including OCERS’ general consultant NEPC reviewed 14 managers’ historical performance data before choosing 3 finalists and ultimately awarding the mandate to Pantheon. Several of the unsuccessful bidders have told OCERS they plan to restructure their fees to win over other pensions.
“This will likely result in a permanent downward shift in fund of fund management expenses for public pension funds nationwide, even for public plans that do not take advantage of the attractive terms offered by Pantheon,” said investment consultant Jim Link of PFM Advisors, who helped select Pantheon from the three finalists.
A team comprised of California pension CIOs helped develop the request for proposal strategy, the outcome for which was “much better than what the original CIO working group envisioned”, said Don Pierce, CIO of the San Bernardino County Employees Retirement System and a member of the group.
“We expect that Pantheon’s programme will be viewed favourably by a number of public plans, ranging from first time investors in private equity…to larger plans seeking to augment an existing program with targeted geographic or sector mandates,” Allan Martin, a consultant at NEPC, said in the statement.
In April 2013, OCERS released a new fee policy that outlined the pension’s plan to push back against fees. The policy gave preference to fund managers that offered “the most advantageous fee structures”, Private Equity International reported.
“What caught our trustees’ eyes was the large increase in indirect investment expenses, when they looked at the 2013 investment budget,” Miller said at the time. “Because those costs are indirectly charged against fund expenses, and not billed directly, they were not highly visible before.”
OCERS’ indirect investment management fees jumped from $22 million to $45 million in the 2013 budget, which was a “compelling reason to revisit our fee policy” and become more proactive, according to Miller.
OCERS has a 5 percent target allocation to private equity and a 3.6 percent actual allocation, as of January, according to an investment report. The pension system has $11.5 billion of assets as of 31 December 2013, according to the 2013 annual financial report.
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