A number of significant US investors in private equity are currently without a permanent chief investment officer.
New York State Common Retirement Fund, Arizona Public Safety Personnel Retirement System and Alaska Permanent Fund Corporation (though not strictly a pension) are operating with temporary executives, while California State Public Employees’ Retirement System is yet to identify a replacement for the outgoing Ted Eliopoulos.
Together these institutions represent around $640 billion in assets, of which $53 billion is in private equity.
One US public institution that has sought a new CIO within the past 12 months tells Private Equity International such investors are now having an especially “tough time” hiring for the role.
Four issues have combined to create the perfect storm.
1: No money, mo’ problems
US public pensions are facing a funding crisis. Unfunded liabilities of state-administered pension plans exceeded $6 trillion as of December 2017, up $433 billion from the previous year, according to the American Legislative Exchange Council.
Pensions are considered to be at risk of defaulting on liabilities if they have less than 80 percent fund ratios, or 70 percent in a worst-case scenario. The national average funding ratio in the US is 33.7 percent.
“CIOs are now caught in the crossfire,” Alex Thomson, partner and head of US asset management at executive search firm Odgers Berndtson, tells PEI. “They’re getting pressure from the legislature to create outsized returns to make up for the shortfall, which changes the risk profile of these pensions.”
2: Keeping up with the Joneses
Public pensions are typically unable to offer salaries or incentives on a par with their private counterparts, making it harder to attract top talent. At least 80 percent of corporate pension funds offer performance-related compensation, compared with 41 percent of public pensions, according to Coller Capital.
South Dakota Investment Council, which has more than $14 billion in assets, aims to pay 70 percent of the compensation and bonuses paid for a comparable private sector role, state investment officer Matt Clark tells PEI. The 30 percent discount is applied after taking into account living cost differences for the region.
“We’ve never lost talent to the public sector, always to the private sector,” Clark says.
“Our observation is that other public plans do not do things in that way, [they] may not directly measure the discounts they have from the private sector or may not be effectively able to develop targeted discounts and get there. And many of them have struggled to keep their talent.”
Some of the bigger players have recognised the importance of staying competitive. CalPERS will offer its next CIO $424,500-$707,500 per year with a potential 150 percent annual performance award, more than the $408,000-$612,000 range and up to 75 percent incentive granted to Eliopoulos, according to Grant Thornton documents prepared for CalPERS in June.
Such generosity isn’t replicated by all public institutions. The median salary range for CIOs in CalPERS’ comparison group is $396,000-$594,000, with a $495,000 midpoint, noted Grant Thornton.
3: Jobs… jobs everywhere
The US jobs market is in rude health. Unemployment edged down to 3.9 percent in August, significantly improved from around the 5 percent mark two years prior.
The asset management industry is no exception. A heady fundraising environment for private equity has seen firms accumulate monstrous sums of dry powder that needs spending. Under pressure to invest, managers around the world have gone on hiring sprees to ensure they have enough hands on deck, thus creating a shortage of investment professionals available for other institutions.
Swiss-headquartered Partners Group is among those bolstering staff numbers to meet growing client demand. Its ranks grew around 5 percent during the first half of 2018 and the firm could reach up to 150 hires by the end of the year to match its anticipated AUM growth for the year
4: Into the wild
Geography can play an important role in the hiring process. State pensions face obvious physical limitations, unlike private institutions that may have multiple offices across the country, or even the world.
For the likes of Alaska Permanent Fund Corporation, the local financial services industry is essentially non-existent, introducing the added challenge of persuading a talented individual – and potentially their family – to relocate to the remote state. APFC is therefore likely to promote from within.
South Dakota Investment Council – though not on the hiring trail for a CIO – faces similar issues, given that its headquarters in Sioux Falls is unlikely to be the most appealing destination for an investment professional who could also receive offers from California or New York-based institutions.
To compensate, the fund offers internships to talented students from local universities who have expressed an inclination to working in public service long-term. Around 95 percent of its staff grew up in South Dakota or attended one of its schools.
“It gets cold here in the winter, so you have to be used to that and find that it’s tolerable,” Clark says.
“You’re not finding all of Southern California moving to South Dakota for great weather and there’s a reason we’re a sparsely populated state, because we’re up here in the northern plains. But after that everybody here knows that they could compete for a position that paid 30 percent more in the private sector, although they probably have to move and … they might not get to work for a mission that they’ve taken to heart, working for maybe the same teachers that taught them in elementary school or at the university.”
While such a programme would certainly help to insure an institution against future CIO hiring shortages, and SDIC’s peers would do well to pay attention, it offers little in the way of an immediate fix to what appears to be a nationwide problem.