PRIM seeks to up PE allocation following strong returns

The Boston-based pension system is awaiting board approval to increase its private equity allocation from 10% to 11% of its $62bn fund, after the asset class outperformed all others in 2016.

The Massachusetts Pension Reserves Investment Management Board (PRIM) proposed at its 31 January meeting to increase its target allotment for private equity from 10 percent to 11 percent – a rate closer reflecting its current allocation.

The committee unanimously approved the recommendation, which is subject to approval by the board of administration at its 14 February meeting, according to a PRIM spokesman.

The move comes as private equity outshined all other asset classes for the Boston-based pension plan in 2016. PRIM has consistently ranked among the top US public pension funds for private equity returns by the American Investment Council. For example, PRIM ranked number one out of 155 public pension funds in AIC’s 2015 report, having generated a 17.93 percent 10-year private equity return.

PRIM, which had 10.7 percent of its $62 billion assets in private equity as of 31 December, is already closer to that new 11 percent target. The committee unanimously approved the recommendation, which is subject to approval by the board of administration at its 14 February meeting, according to a PRIM spokesman.

Outlining its reasons for the allocation increase, PRIM’s investment committee cited private equity’s returns – which come in 4 percent to 6 percent higher than public equity per year, and the exposure it offers to markets that are unavailable to public equity. It also noted, however, that private equity poses risks such as high valuation multiples of companies and competition for limited space in high-demand private equity funds.

PRIM’s Pension Reserves Investment Trust (PRIT)’s private equity portfolio, which PRIM divides into venture capital and special equity, generated annualised gross internal rates of return of 13.8 percent, 16.8 percent, 17.4 percent and 14.1 percent for the one-year, three-year, five-year and 10-year periods leading up to 31 December, according to its latest performance report.

For all four periods, private equity outperformed all other asset classes within the PRIT portfolio, which includes value-added fixed income, which consists of high-yield bonds, emerging market debt, distressed debt and bank loans; core fixed income, which has inflation-related bonds; real estate; global equity, which invests in a passive world index fund; timber; and hedge funds. The overall PRIT fund generated an 8 percent gross IRR for the year leading up to 31 December. Since inception, private equity generated a net IRR of 13.2 percent for PRIM.

Throughout that year, the PRIT fund committed a total $750 million to private equity, including $150 million to Berkshire Fund IX, $100 million to Thoma Bravo Fund XII, $85 million to Kainos Capital Partners II – which was a new relationship for PRIM – and $85 million to Quad-C Partners IX.

Including venture capital, there was a total of 12 commitments made throughout 2016, according to PRIM’s investment committee meeting agenda for 31 January.

As a result of the proposed target allocation increase for this asset class, PRIM would decrease its target for core fixed income by 1 percent, the meeting material showed.