State Representative Frank Ryan, a Republican representing Lebanon, Pennsylvania, has been serving on the Pennsylvania Public School Employees’ Retirement System board since 2019. He is now the vice-chairman. A former accountant who worked with private equity firms in the past, as well as a part-time professor of accounting and a private investor himself, Ryan almost always votes against PE commitments at board meetings, often as the only dissenting voice.
Buyouts caught up with Representative Ryan to learn more about his thinking. He pointed out the pension’s funding level, which was 58.1 percent as of June 30, 2019, as a major reason he does not support the levels of illiquid investments which PA PSERS is taking on. As of March 31 of this year, PA PSERS had a 16 percent allocation to private equity.
Ryan explains why he feels it is important that people are aware of the risk the system is taking on.
Why do you so frequently vote against PE commitments?
Any time you do an asset allocation model, in my mind, you have to be really careful about the demographics of the payouts. So, as an example, Pennsylvania’s got an older work force. We have a relatively stagnant population. We have not been increasing population for an extended period of time. We’ve even had a couple of years where we’ve had a declining population.
We have a set of demographics in the commonwealth that are not conducive to a heavier weight of more illiquid-style investments than states that are growing. So, if I were on the Texas pension board, which has got the exact opposite type of demographics than we do, I would be telling you our asset allocation mix is perfect. And I’d be voting for them all day long. I might even go higher weight.
What are your longer-term concerns?
I would be reluctant to make commitment to a great asset investment only to find out at some point in time that our portfolio becomes completely unbalanced, because I have to sell my liquid investments to make pension payments, and therefore I’m out of balance and may have to start selling off some of my private equity deals.
Because I have an asset allocation model that’s been approved, if I sell my liquid investments, I’m now out of balance in my portfolio and I have to get it back. I could turn off the spigot by not making any new [private equity commitments], but then I’ve got $11 billion in commitments, which throws me out the other way. I actually think private equity investments need to be made. But… I believe it’s my responsibility to make sure I don’t put the system into a situation in which they’ve got no alternatives.
What are your general feelings on private equity?
I do think that private equity can help you get higher returns. But where I disagree with it is, it’s kind of a nuance, but I think it’s an important nuance: if you’re doing it to chase yield because of your underfunded status, I would tell you the fact that you’re chasing yield because you’re underfunded is a bad reason to do it.
If you’re doing it because there’s great yield and opportunities for higher rates than you would typically get in other types of investments, then I would say go do it. I think there’s a tremendous place for private equity and for any type of alternative investment, as long as the liquidity of the fund and the outgoing payments are clearly understood.
This has been edited for length and clarity.