Arizona pension speeds co-investment decisions with reserve pools

The battle is on for co-investment opportunities and limited partners are finding innovative ways to gain an edge.

Arizona Public Safety Personnel Retirement System’s strategy centers on reserving co-investment allocations when making fund commitments, according to Mark Steed, deputy chief investment officer and chief of staff for the Arizona pension fund.

The reserves, preapproved by the board, let the investment staff act quickly on opportunities. “We don’t have to wait for the next board meeting to [make] a decision on attractive co-investment opportunities,” Steed said. “The reserve allocation gives us the ability to manage risk, leverage the fee load and manage our asset allocation in the portfolio.”

Arizona PSPRS tends to reserve half the size of its commitment for co-investments. Most recently it reserved $20 million when committing $40 million to Trustbridge Partners VI LP Fund.

The pension fund used the same approach earlier in the year, committing $30 million and reserving a $15 million co-investment allocation to Patria Investments’ Private Equity Fund VI Feeder LP.

Previously it reserved $30 million for co-investments while committing $60 million to Charlesbank Capital Partners’ Fund IX.  It reserved $20 million for co-investments while committing $40 million to KKR’s  third Asian fund.

The $1.2 billion private equity portfolio accounted for about 13 percent of the $9.6 billion Arizona Public Safety pension fund for the period ended Dec. 31, 2017. It generated the highest returns among all asset classes, returning 14.75 percent over three years and 16.63 percent over five years.

The pension fund invests in lower-middle-market funds between $500 million and $4 billion. Buyouts comprise 80 percent of the investments, and growth equity and venture capital share the remaining 20 percent, Steed said. The portfolio is U.S.-focused, but the pension fund has recently added investments in China, Vietnam, Singapore and Australia.

Arizona Public Safety has a core group of about 30 managers who manage 50 funds in its PE portfolio, so most of the commitments are re-ups, Steed said. “As the funds become bigger, they graduate out of our system, making place for new relationships.”

A recent new relationship is Light Bay Capital, the PE firm co-founded by Nav Rahemtulla and Adam Stein, both of whom were original members of the private equity team at Ares Management. Arizona Public Safety committed $30 million to the debut fund and reserved $10 million for co-investments.

The private equity portfolio reflects the philosophy of a pension fund that manages benefits for nearly 59,000 members and 250 employer groups through the state, Steed said. “It helps us earn a premium on our investment while helping us manage our risk,” he said.