Fresno County pension eyes pausing PE commitments as cashflows dwindle

Fresno County Employees’ Retirement Association may pause making additional commitments for the second half of 2023 as its top investment officer believes the system’s consultants overestimated projected distributions.

Distributions have become a focus for many LPs as the slowed exit market is causing liquidity concerns. But Fresno County’s possible action is a dramatic step, especially as its investment staff and consultants widely differ on projected distributions.

Fresno County Investment Officer Anirudh Chowdhry recommended the system pause making new private equity and private credit commitments in the second half of the year.

His recommendation was included in a note in advance of the system’s next board meeting, scheduled for April 5. Chowdhry told Buyouts the system would continue to fund existing commitments.

According to Chowdhry’s note, Hamilton Lane and Aksia, respectively the system’s private equity and private credit advisers, projected a combined total of $580 million in distributions for 2023 and 2024. Chowdhry said the system’s internal analysis projected $300 million in distributions – a difference of $280 million.

“This current market environment is punctuated with economic uncertainty, frozen financing markets, and volatile and range-bound equity markets. Our calls with private equity and private credit managers substantiate (our) view,” Chowdhry said.

Verus, the general investment adviser for Fresno County, agreed with these assessments in a pacing analysis conducted earlier this month.

“I am recommending a pause in new commitments for the remainder of the year because distributions are uncertain, which could cause a substantial negative cashflow making FCERA a forced seller of liquid assets at an inopportune time,” Chowdhry said.

Stay or go?

Consultants often advise LP clients to stick with their PE pacing, even in uncertain times. Any disruption in vintage-year exposure could lead to an LP missing out on a fund deploying capital into great market opportunities, especially in times of distress when prices are weaker. Some systems ended up missing out on historic return opportunities after they paused their PE programs in the global financial crisis in 2008, only to not benefit from vintages in the years after.

The proposed pause would carry little downside risk, Chowdhry said, adding that he has no “fear of missing out” as private equity fundraising cycles have extended from six months to over 15 months.

“(It’s) easy to accelerate pacing if needed post-December 2023,” according to the note.

Chowdhry said via email that his experiences managing illiquid investments during the financial crisis led to his projections.

“I may be too skeptical and my assumptions too draconian. The equity markets may bounce back significantly over the next few months and everything is fine,” he said. “The projections are the worst-case scenario, which may not happen, but provides an appreciation of the repercussions from stagnant equity markets and frozen credit markets for an extended period of time, which has not happened over the last decade,” he said.

According to Chowdhry, Hamilton Lane projected that private equity would result in $106 million in distributions this year, or 22 percent of Fresno County’s existing PE investments.

Aksia projected that private credit would create $200 million in distributions, or 46 percent of the system’s existing private credit investments.

“It’s unlikely that 22 percent and 46 percent of our existing investments in private equity and private credit will be distributed in the dislocated markets of 2023,” Chowdhry said.

Fresno County targets a 28 percent allocation to alternatives, with 8 percent allocated to both private equity and private credit. The system’s actual allocation to alternatives was 30 percent in 2022, according to the note.

By relying on the consultants’ distribution figures, the projected allocations to alternatives would rise to 31 percent in 2023 and 34 percent in 2024, according to the note. Chowdhry said Fresno County’s estimated distributions would result in asset allocations of 35 percent in 2023 and 39 percent in 2024.

“This increasingly higher exposure to illiquid assets impacts the viability of the plan,” Chowdhry said.

The system does not require a sale of assets if the allocation to alternatives rises above a certain range, Chowdhry said via email.

A spokesperson for Verus declined to comment on this story, while spokespeople for Hamilton Lane and Aksia did not respond by press time.