Pennsylvania Public School Employees’ Retirement System’s subscription lines exposure was almost 11 percent of its total unfunded commitments of $10.3 billion as of 30 June, according to chief investment officer James Grossman.
Grossman’s presentation at a 10 October board meeting showed subscription lines exposure was $330.2 million for private equity, $395.1 million for private real estate and $367.7 million for private credit. This was the first time PSERS presented the report on subscription lines exposure, and it intends to present the data every quarter, Grossman said.
Subscription lines, or capital call facilities, are a revolving line of credit provided by a bank to a GP. The latter then use credit lines in place of smaller LP capital calls, preferring to call capital once a quarter or once every six months, Grossman said.
PSERS staff monitors manager use of these facilities, and in many cases the subscription lines remain outstanding 180 days or less, pension spokesperson Steve Esack told Private Equity International.
“Pension fund staff can then focus on matters that will bring value to the fund instead of having to handle the logistics of multiple capital calls,” Esack said.
The pension’s unfunded commitments are more than five times the unencumbered cash at $1.764 billion, which Commonwealth of Pennsylvania treasurer Joe Torsella called “a sobering number.”
“There’s some discussion about what happens when all these vehicles will stop distributing and start calling,” Torsella said at the board meeting.
If the GPs all called capital at the same time, PSERS would tap into and sell off its public equities, Grossman said. The pacing models for private markets also had contingent capital accounts that would be activated only if there was distress in the market.
It is unlikely that all $10.3 billion in unfunded commitments will be drawn down very quickly, investment consultant Hamilton Lane’s Cori English said at the meeting.
Hamilton Lane studied its data from 2000 onwards and “the rate of contributions or the rate of calling down commitments is right on par with the historical average of about 40 percent of the unfunded commitments being called down annually,” English said. The unencumbered cash was 17 percent of the total unfunded commitments as of 30 June.
The only part of the market that could see acceleration in drawdowns is the distressed markets, but the drawdowns across the rest of private markets remained relatively consistent, according to Hamilton Lane’s Sean Barber.
Very little capital was called in by GPs during the 2008 financial crisis, Grossman added. “Not a whole lot of business was transacted because the bid-ask spreads got really wide. What you believed was your company’s worth and what I believed it’s worth tended to be wider.”
PSERS is paying management fees on committed capital, essentially paying the GP while the manager took funding from the bank, Torsella told Private Equity International. Torsella has been critical of fees paid to private equity firms.
However, subscription lines do not increase management fees on funds that charge on committed capital during the investment period. They may, however, result in a small reduction in management fees on funds that charge on drawn capital during the investment period, due to the delay in drawing down capital from LPs, Esack said.
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