Pennsylvania Public School Employees’ Retirement System is planning to sell a private markets portfolio as it looks to reduce fees paid to external managers.
The $55.6 billion US pension’s retirement board authorised the sale provided that it receives at least 100 percent of net asset value as of 30 June, according to an update on PSERS’ website. The pension’s chief investment officer will determine which funds will make up the “most efficient grouping” for the sale.
The size of the potential portfolio was not disclosed and a spokeswoman for PSERS told Private Equity International there was no additional information to share at this point in time.
It is unclear whether an advisor has been appointed to work on the sale.
A state commission’s report released in December recommended PSERS and fellow state pension Pennsylvania State Employees’ Retirement System “reconsider” the role of illiquid investments in their portfolios, particularly private equity. The recommendations, which include shifting to more passive, low-cost market indices, could save the state almost $10 billion over the next 30 years, the report noted.
The commission recommended that PSERS “carefully reconsider the risks of its current allocation targets for illiquid private equity investments” and reduce them to “more appropriate levels”.
The report did not recommend either pension exit private equity as an asset class.
PSERS’ board asked its investment staff and external consultants in December 2017 to identify ways to reduce management fees over a three-year period, including recommendations for alternate fee structures which distinguish between “base fees” and “profit sharing” and other fee structuring and reporting practices.
In July, consultant Hamilton Lane suggested a sale of non-core fee-paying funds as one of at least six ways PSERS could reduce fees.
“While there are costs associated with engaging a broker, the sale option could offer an immediate reduction in fees paid to non-core funds,” Hamilton Lane wrote in a memo to PSERS’ CIO. “The proceeds could then be re-deployed into co-investments or other strategic buckets of capital with reduced fee rates.”
Hamilton Lane also warned that pricing for older vintage funds can “vary widely” and that PSERS could end up under-allocated to private markets in the short term.
“Large scale rebalancing of private equity portfolio could also place strain on the near-term [internal rate of return] of portfolios as mature assets could potentially be replaced with funds in their J-curve period,” the consultant added.
As other ways of reducing fees, Hamilton Lane also suggested the increased pursuit of strategic partnerships; use of side-car co-investment vehicles; enhanced measurement of fee savings and board reporting; targeting non-management fee reductions for new investments; and direct investing.
PSERS and SERS were accused in May by state treasurer Joseph Torsella of squandering billions of dollars on fees to private equity managers. In a speech made at the Pennsylvania Association of Public Employee Retirement Systems conference, Torsella claimed the pair had wasted up to $5.5 billion in investment expenses and that “at least one simple, low-cost passive strategy would have performed far better, and saved a fortune”.
Several academics have criticised this emphasis on fees.
“Focusing on fees alone is meaningless – net returns matter,” Claudia Zeisberger, professor of entrepreneurship & family enterprise at INSEAD and academic director of its global private equity initiative, told PEI in July.
“A fee-focused investment strategy may expose one to higher volatility of returns and prohibit entry to growth-oriented emerging economies where public markets rarely provide the juicy deals.”
PSERS had $5.9 billion worth of private equity exposure as of 30 June, accounting for 10.7 percent of its total portfolio, according to its latest annual financial report. Its largest commitments include $400 million to the 2008-vintage TPG Partners VI, $375 million to the 2008-vintage LBC Credit Partners II and €300 million to the 2009-vintage CVC European Equity Partners V, according to PEI data.
– This report was updated with a response from a PSERS spokeswoman.