Penn SERS board pushes for more transparency

Pennsylvania State Employees’ Retirement board has told staff to work towards better GP and staff reporting on private market returns and fees to make its portfolio more transparent.

The directive, issued at a 14 June meeting, is effective immediately.

The board also amended an April 2018 motion, requiring GPs to provide fee disclosures in accordance with the Institutional Limited Partners Association’s reporting template, according to a press release. Previously this information was ‘requested’ from managers, who could choose whether they wished to comply.

SERS has until 2020 to put together its report on gross-of-fee investment performance data and develop an annual report of all private markets managers’ fees and expenses.

The board also told staff to develop a standard checklist for transparency issues when evaluating managers.

The moves come after recommendations of the Public Pension Management and Asset Investment Review Commission led by state representative Mike Tobash and treasurer Joe Torsella to review the two Pennsylvania pension systems.

The commission presented its final report on December 20. The report was critical of high investment fees and lack of transparency in disclosing details on private equity managers by SERS and Pennsylvania Public School Employees’ Retirement System.

In particular, SERS was the less transparent pension system of the two, because there is no provision in its retirement code that the information is public record. This allowed it to disclose only “incredibly limited data on its private equity and real estate investments”, the report said.

PSERS’s code, on the other hand, says information related to alternative investment vehicles, including valuation, performance, fees and costs, are public records and therefore “subject to public access under the Right-to-Know act”, the report said.

SERS’ interpretation of ‘sensitive’ kept most information confidential, including who the sub-asset class managers were.

“It’s great to see action towards more transparency. It’s gratifying,” said a source who had worked with the Commission.

Treasurer Torsella issued a statement to Private Equity International:

“I applaud SERS for taking these proactive steps toward reforms that can provide meaningful transparency and reduce risk. As a member of the SERS board, and vice-chair of the PPMAIRC, I believe that if we are truly putting Pennsylvanians before Wall Street, public funds should not be shielded from accessibility or appropriate scrutiny. Beneficiaries and taxpayers alike should have the information they need to hold decision-makers accountable. Transparency strengthens government, and is fundamental to prudent fiduciary oversight. If SERS follows through on the preliminary steps announced last week toward greater transparency, and continues its efforts to lower fees, the system will be well on its way to the roadmap outlined by the PPMAIRC.”

SERS’ PE portfolio

The number of funds in SERS’ $3.8 billion private equity portfolio also came under review during the commission’s hearings.

“We have learned that there are a large number of individual private equity investments in SERS’ portfolio. Such a large volume of small private equity investments is rather unusual from our experience, and by definition, difficult to manage/monitor,” Marcel Staub, co-founder and chief executive of Novarca North America said in his October 25 presentation. Novarca, a cost specialist manager for institutional investors, was hired last June to help the Commission.

However, SERS has been actively trimming its PE portfolio, reducing GP relationships and increasing commitment sizes, Bryan Lewis, chief investment officer, said at the hearing.

The plan is to create a core GP list of about 60 managers, and the pension system will sell stakes on the secondaries market, a source familiar with the SERS said.

The pension system had 63 GPs in its private equity portfolio as of 31 December.

The pension system consolidated and moved a total of 163 legacy holdings to a special purpose vehicle, Keystone Legacy Fund, managed by Fairview Capital, to pare down its non-core GP relationships, according to its 2018 annual report.

SERS was invested in 345 funds across 153 managers as of 30 June 2017, according to its investment advisor StepStone’s presentation.

In addition, the pension system had negotiated lower fees by committing across strategies with preferred GPs, through co-investments, and by getting better terms by participating in first closes of funds, Lewis said at the hearing.

Recent cheque sizes have been $75 million and more to meet the annual private equity investment pacing plan of $650 million, according to SERS’ 2018-2019 investment plan.

SERS’ private equity portfolio generated an internal rate of return of 11.4 percent over one year, 7.9 percent over three years, 10.3 percent over five years and 10.1 percent over 10 years as of 31 December.

The pension did not respond to requests for comment.