The Orange County Employees Retirement System (OCERS) has raised its target allocation to private equity to 8 percent from 6 percent, according to a memo from the pension following its 25 January investment committee meeting.
OCERS, which manages $13.24 billion in assets as of 31 December, approved a new asset allocation policy during the commitee meeting that resulted in the increase.
OCERS’ private equity programme includes venture capital, buyouts, secondaries and special situations including distressed debt, according to the Santa Ana-based pension’s investment policy from 2015.
It would have to deploy capital at a swift pace during 2017 in order to meet the new target allocation, however, because its actual allocation to private equity stood at 5.5 percent, or $725 million in market value, as of 31 December, according to OCERS’ investment report from 25 January.
In November, Private Equity International reported that OCERS was looking to hire private equity fund of funds managers to help the pension invest $150 million in each of the next two years. Deadline for proposal submissions was 5 January, and the outcome of this search process wasn’t immediately clear.
As of 31 December, OCERS’ private equity portfolio generated a 3.07 percent net internal rate of return for that month. It outperformed the Cambridge US Private Equity Index benchmark for one-year and three-year periods leading up to 31 December, at 8.42 percent and 13.59 percent net IRR, respectively.
However, it underperformed the benchmark for the three-month, five-year, seven-year and 10-year periods leading up to 31 December.
As a result of the policy change, OCERS also increased its target allocation for other asset classes. Core fixed income increased from 13 percent to 17 percent, real assets increased from 18 percent to 22 percent;,and risk mitigation increased from zero to 5 percent.
While the makeup of OCERS’ new risk mitigation portfolio was unclear, other pension plans such as the California State Teachers’ Retirement System list risk mitigation portfolios as having a low to negative correlation to global equities – through asset classes like US Treasury bonds, for example.
Credit, meanwhile, decreased from 14 percent to 13 percent and absolute return – which encompasses hedge funds investing in equities, bonds, currencies and emerging markets – was eliminated from OCERS’ portfolio.
With this new asset allocation strategy, OCERS’ expected return for its entire investment portfolio is 7.8 percent for a longer-term horizon of more than five years. As of 31 December, the pension was generating a 7.1 percent for the five-year period leading up to that date, the memo said.
Some of the private equity funds OCERS has committed to in recent months include OCP Asia’s Orchard Landmark II, which launched in 2015 and had raised $100 million as of January 2016, according to a Securities and Exchange Commission filing; Park Square Capital’s €1.19 billion Park Square Capital Partners III; and Monroe Capital’s $844.3 million Monroe Capital Private Credit Fund II, according to PEI data.
OCERS was not available to comment.