LPs

In subdued fundraising market, Pennsylvania State pension plans to cull GP relationships

'Over the years, we had a number of funds that drifted into the plan. It became insurmountable for us to deal with. We want to commit larger amounts to fewer funds while still being diversified,' PA State CIO James Nolan said.

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Pennsylvania State Employees’ Retirement System will work to reduce the number of managers and funds in its private equity portfolio.

As limited partners struggle with overexposure issues and slowing distributions, they face tough choices as they cull their portfolios and slow their commitment pacing. PA State has trimmed the number of funds it invests with by more than 40 percent over the past several years and still sees more work ahead.

The $34.7 billion system’s investment committee discussed the private equity program at its meeting September 19. Buyouts watched a broadcast of the meeting.

The system has 196 funds in its private equity portfolio, down from 335 in 2017, according to a presentation from StepStone Group, PA State’s private equity consultant. PA State currently backs 67 managers in its private equity portfolio, StepStone said.

PA State CIO James Nolan said culling the portfolio would make the PE program more efficient.

“Over the years, we had a number of funds that drifted into the plan. It became insurmountable for us to deal with. We want to commit larger amounts to fewer funds while still being diversified,” Nolan said.

“We’re very happy with roughly 35 of the 67 core relationships in the portfolio,” said Matthew Roche, a managing director at StepStone.

The number of PA State’s managers will “smooth out somewhere in the 50s” over the next three-to-five years as the system’s legacy portfolio unwinds, Roche said.

Roche said the system plans on bringing between six and 10 private equity opportunities annually, focusing mostly on reups with existing managers.

According to PA State’s investment staff, the system’s actual allocation to private equity is 19.2 percent, above its 16 percent target – a difference of $1.1 billion.

The system’s private equity portfolio has a net IRR of 18 percent over the past decade. The portfolio also returned $6 billion more in distributions than contributions since inception – a 1.3x DPI, according to StepStone.

According to StepStone, PA State has been cashflow positive for nine of the past 11 years – including 2023.

“I would not be surprised if the rest of 2023 is marginally cashflow negative since the exit environment has been challenged. It’s improving, but it’s not all the way back,” Roche said.

A previous version of this report included an incorrect title for Matthew Roche, who is a managing director at StepStone Group. The report has been updated.