Kansas law opens door for state pension to boost PE exposure

Kansas Public Employees Retirement System will be able to increase its private market allocations due to a new law lifting the pension’s cap.

Many LPs in recent years have faced difficult decisions as the denominator effect raised their allocations to private assets near or above target ranges. Public pension plans that have their alternative asset targets capped by state law felt the brunt of overallocations.

A newly enacted Kansas state law will allow the $26.2 billion pension to invest up to 25 percent of its total fund to alternative assets, up from the previous cap of 15 percent. The system has supported the law, with CIO Bruce Fink and executive director Alan Conroy testifying in support.

Kansas PERS was one of the pension’s most impacted by the denominator effect and its legally mandated target.

Under the old state law, investment staff would be forced to limit, if not eliminate, any commitments to alternatives if the allocations reached over 15 percent. Kansas PERS CIO Bruce Fink testified to the state legislature that the system’s allocation to alternatives exceeded 14 percent in recent years.

The system was forced to pause making new commitments to alternatives in 2022 as it neared the 15 percent cap. Investment staff at the time feared the system would lose access to preferred managers as a result.

In 2023, the system reduced its private equity pacing plan from levels set at previous years as the system neared the cap.

Kansas targets 11 percent of its total fund to alternatives, the bulk of which goes to private equity. The system also invests in infrastructure through its “real return” bucket.

As of the end of 2023, the system actually allocated 10.8 percent of its total fund to alternatives, according to the system’s latest performance update, which reflected the strong growth in public equities in the last few months of the year.

It’s not known if or when the system may decide to boost its alternative asset target.

Not a full win

However, the pension did not achieve a full victory in its legislative goals, according to various state legislators involved in the process.

The initial bill sought to eliminate the alternative asset cap entirely and grant Kansas PERS’s board full control over its asset allocation policy, a practice followed at several other public pensions throughout the country.

This legislation was quickly amended to not grant the board this level of control, instead choosing to initially lift the alternative asset cap to 20 percent, state legislature records show. The legislature settled on a 25 percent alternative asset cap during further negotiations.

“The State Senate wanted to take a more conservative approach,” said one state legislator involved in the negotiations.

Eventually, the alternative asset cap legislation was folded into broader legislation that also included divestment from public assets with exposure to certain countries and changes to beneficiary payments.

The bill became law without Governor Laura Kelly’s signature, a process allowed in Kansas.

In 2023, New York State’s legislature voted to increase the cap on alternative assets for pensions located within its borders. New York City’s pension plans have since taken advantage of this rule, with all of their private equity targets now set at 10 percent.