Kansas wants to hike PE allocation amid soaring exposure

The denominator effect has limited the system’s private equity options.

Kansas Public Employees Retirement System may ask the state legislature to increase how much it can allocate to alternative assets.

Public pension systems are contending with soaring allocations to private equity, often breaching policy-set allocation caps. Some public pension systems face statutory regulations that force them to make investment decisions if the actual amount exceeds the acceptable range.

Kansas can’t allocate more than 15 percent of its portfolio to alternative assets. Earlier this year, the $26 billion system announced it could not make additional private equity commitments as it approached the 15 percent limit.

“This is already impacting our decision-making and it is already in play,” said Richard Pugmire, a partner at consultant Mercer, during the Kansas meeting held September 29. Buyouts watched a webcast of this meeting.

Dean Roney, the system’s deputy CIO for private markets, said Kansas risked losing access to good managers due to the allocation limit.

“These constraints have become a real factor,” he said.

Board members said they could ask the state legislature later this year to increase the allocation limit. The state legislature last set its alternative asset limits in 2012.

Staff said it would provide a recommendation on a potential new limit at a later date.

“From my perspective, having no limit would be best so we would be fully reliant on staff and consultants to try and maximize returns. If that’s not available, we’ve had brief discussions about trying to take it up to 25 percent,” said Roney.

The system’s total exposure to alternative assets hit a high of 13.8 percent in July, according to Roney.

The actual allocation to private equity was 11.5 percent, above its long-term target of 9 percent, he said.

Private equity has averaged 17.4 percent annually in gross returns over the past 10 years, making it the system’s most successful asset class, Roney explained.

The system has invested across 79 funds since its inception in 2007. The portfolio has gained $2.1 billion since that time, according to Roney.