LP Radar: Object lesson

The Massachusetts Pension Reserves Investment Management Board, MassPRIM to the initiated, is emblematic of a recent trend among pension systems to concentrate larger pools of investment with fewer managers. Pensions are cutting relationships with non-core GPs, focusing on keeping costs low, and in general taking a more studied look at the recommendations their consultants bring them.

VALUE CREATION

At MassPRIM’s February meeting investment officials noted that budget expectations for the next fiscal year will be down again around 3.3%, or $12 million, year on year. While $12 million isn’t pocket change by any means, investment officials seem unfazed.

Part of that reduction is from MassPRIM’s 2013 initiative called Project SAVE which is tasked with finding value enhancements across the pension portfolio. Since the initiative began, Project SAVE has created annualised savings and return enhancements of over $100 million.

“We are extremely proud that we are doing much more with much less. As a reminder, PRIM is managing more money than ever before ($62 billion) with the largest and most competent staff we have ever had,” MassPRIM CIO Michael G. Trotsky said at the meeting. “We have achieved strong performance on both an absolute and relative basis, returning over $5.5 billion to the state over the last 12 months alone ($1 billion outperformance over benchmark).”

HIGH PERFORMANCE

Much of that has been led by the private equity portfolio which returned a net IRR of 13.9 percent for the fiscal year 2014. MassPRIM has a total portfolio exposure of approximately 10 percent to private equity. Uniquely, the MassPRIM portfolio has the same target exposure to all of the other alternative asset classes including hedge funds, real estate, and opportunistic fixed income. The 10 percent target also represents a generally larger target allocation for any alternative asset class, let alone alternatives in general, over other pensions we have discussed on these pages.
For 2015, MassPRIM has approximately $1.7 billion allocated to private equity and based on data from the February minutes, a good portion of that figure is already invested. Over 600 million had been allocated to eight funds across a variety of core exposures.

Catalyst Ventures, Insight Venture Partners and Insight Growth all saw venture mandates to start the year, while the secretive Rhone Group got a $150 million mandate for its new Fund V. Little is known about that fund but the name has cropped up before on these pages as the group appears to be gaining attention from a range of pension funds across the U.S.

Some $250 million is going to Blackstone’s new flagship fund which is targeting $16 billion from investors. Fund VII is the first post-recession effort for a Blackstone flagship fund, and will be smaller than its $21.7 billion predecessor, which closed in 2007. $150 million will go to the CVI Credit Value Fund III managed by CarVal Investors. That fund is targeting $2 billion for opportunistic credit investments globally. A further $200 million is going to TA Associates’ latest flagship fund TA XII for buyouts exposure, and finally, $50 million has been allocated to the Thoma Bravo Special Opportunities Fund. TA Associates Fund XII is currently in market targeting $4 billion for growth equity investments. The Thoma Bravo fund is a $1 billion top-up to its main buyout vehicle, Thoma Bravo Fund XI, which closed on $3.65 billion less than a year ago.

SUSTAINABILITY

At the February meeting, investment officials also approved new proxy voting guidelines that touch on another trend occuring at pension funds across the US – sustainability. The approved guidelines represent a change to MassPRIM’s custom governance and proxy-voting framework by putting an emphasis on progressive issues like diversity, wage equality, renewable energy and human rights standards.

A focus on these issues is more common at the college endowment level where students and other interest groups exert pressure on investment committees to divest investments around hot button issues like gun manufacturing or fossil fuels. Still, some pensions have started to become more vocal about the exposures they have to certain industries through the portfolio companies of their private equity allocations. The California Teachers Retirement System (CalSTRs) continues to make headlines for its effort to cut exposure to gun manufacturers through its investments with Cerberus Capital Management.

Some of Wall Street’s biggest money managers too, have said that wage equality issues in the US represent a systemic risk to the economy, so it’s no surprise then that risk averse investors like pension funds are focusing on ways to mitigate risk around this issue by including it in their governance frameworks.

MassPRIM has already been recognised as an innovator in governance by creating its own policy framework and proxy-voting rules, in addition to bigger initiatives like Project SAVE. The model could serve as a guidebook for other pension systems that are interested in more sustainable and inclusive standards.