San Bernardino plans to commit $400m to PE in 2017

The planned commitment is up $20m from the pace achieved in 2016.

The San Bernardino County Employees’ Retirement Association’s board approved a target commitment of $400 million for private equity in 2017, according to minutes from its 6 December board meeting.

The amount includes $340 million in specific budget allocations – based on conversations with managers on potential investment opportunities for the year – and $60 million for potential new investment opportunities for the 2017 year.

The allocated capital includes $315 million for six master custodial accounts (MCAs), which are separate accounts with open-ended agreements for multiple follow-on commitments.

For example, SBCERA entered an MCA with Switzerland-based Partners Group in 2013 that allocated $120 million to be committed to the manager over a three-year period. In November, the California-based pension extended its MCA with Partners Group for an additional three years, according to its 15 November meeting agenda. SBCERA plans to commit $60 million to the firm in 2017.

An SBCERA spokesman told Private Equity International the pension has six MCAs involved in the private asset segment of its investment portfolio.

The allocated capital also has a non-MCA commitment of $25 million to London-based credit firm Alcentra, which does not have an MCA relationship with SBCERA. While the plan lists fund managers, it does not specify specific funds. However, at the same December meeting, the pension board approved a rescindment of a $25 million commitment approved in August 2015 to Alcentra in 2015 due to the general partner’s use of credit facility that did not meet SBCERA’s requirements.

The spokesman said the pension continues to have a positive relationship and other investments with Alcentra.

The total private equity commitment budget of $400 million for 2017 is $20 million above the actual commitments made in 2016, and the pension’s unallocated private equity budget of $60 million for 2017 is six times the amount set aside for 2016, the meeting minutes showed.

According to investment researcher and consultant NEPC, SBCERA’s private equity portfolio stood at a net asset value of $1.25 billion, or 14.4 percent of total fund assets of $8.66 billion, as of 30 June – below the pension’s 16 percent target allocation.

NEPC recommended in the December meeting materials that SBCERA overcommit to private equity by 1.5x the target allocation, or 24 percent, to reach its 16 percent actual target, based on a schedule of historical fund drawdowns.

The advisor also indicated that SBCERA will maintain its 16 percent target allocation for private equity for the next decade, but plans to more than double the pension’s private equity NAV in the same period from $1.39 billion in 2016 to $2.85 billion in 2026, to keep up with the expected growth of the overall fund.

According to a document for the upcoming 2 March meeting, SBCERA’s private equity portfolio generated a 9.74 percent net internal rate of return for one year ended 31 January. For the 2017 year, the pension has a 7.5 percent target investment return for its overall fund.

SBCERA’s 2017 private equity commitment plan includes:

• Credit-focused Alcentra, $25 million

• Distressed-focused Ares Management MCA, $25 million

• Emerging markets-focused Gramercy MCA, $50 million

• Secondaries firm Industry Ventures, $60 million

• Diversified international fund of funds Partners Group MCA, $60 million

• Diversified fund of funds Pathway Capital MCA, $70 million

• Direct lender Tennenbaum MCA, $50 million

• Unallocated budget, $60 million