Maryland to downshift pace to PE to combat overallocation

The $61.3bn system is overallocated to private equity by 5% as the denominator effect rears its head once again.

Maryland State Retirement and Pension System, facing a steep overallocation to private equity, is ramping back on its pace as it seeks to rebalance its portfolio in the market dislocation.

Many public pension systems have found themselves overexposed to private equity and are considering options to rebalance. Many pensions choose to simply hold their allocations steady, but a few systems are downshifting the pace of their commitments to the asset class.

Maryland will reduce the size of its annual commitments starting this year to $1.5 billion to $2 billion, according to a presentation from consultant Hamilton Lane made at the system’s board meeting February 21. Buyouts viewed a broadcast of this meeting.

Maryland currently allocates more than 21 percent to private equity, above its 16 percent target, prompting the reduced planned annual commitment size.

The system will implement the new annual commitment pace “over the next several years” to incrementally reach the 16 percent target, according to Hamilton Lane vice president Ben Eckroth.

Eckroth said Maryland will target between 14 and 18 managers per year for potential commitments.

“This will create a more concentrated portfolio,” Eckroth said.

For comparison, Eckroth said Maryland made commitments with 30 managers last year. The system committed $2.4 billion to funds with a 2022 vintage year, according to the presentation.

Hamilton Lane recommended the system reduce the size of commitments made to mega and large buyout funds to help reduce its overallocation. At the same time, the consultant said Maryland should increase the size of commitments to top-performing small and mid-market buyout managers.

Along those lines, Eckroth said Maryland should consider allocations to emerging managers. LPs generally shun newer managers in times of economic turmoil, choosing to stick with their more established relationships. However, with other LPs waiting out the dislocation, that opens opportunity for LPs who may not have the same kind of exposure to newer GPs.

Hamilton Lane said Maryland should consider new relationships with growth equity and venture capital managers while continuing to source co-investments from its core relationships.