MassPRIM moves to adopt ‘implementation benchmark’ for PE program

Staff has discussed a 'benchmarking anomaly' that wreaked havoc with its reported returns during the height of the covid market chaos last year.

The market chaos wrought last year by the coronavirus pandemic led another pension system to move toward changing how it measures its private equity program.

A Massachusetts Pension Reserves Investment Management Board panel moved Tuesday to adopt an additional “implementation” benchmark not tethered to the public markets.

Last year, MassPRIM staff repeatedly referred to a “benchmarking anomaly” causing its private equity portfolio to be a drag on its overall returns despite having one of the better-performing programs in the country, as Buyouts reported.

MassPRIM’s current private equity benchmark is the Russell 3000 public markets index plus three percentage points. That benchmark’s returns are based on a multi-year average of public markets returns, while private equity returns measure actual performance over a shorter period of time.

Chief investment operating officer Matthew Liposky called this an “obvious mismatch in time periods.”

“This benchmark is appropriate over longer time periods when the long-term actual performance of the private equity portfolio is compared to the long-term benchmark,” he told the $90 billion pension system’s investment committee Tuesday. “But it is not appropriate to use when looking at short-term performance. Simply put, it is misleading to compare short-term performance to a long-term benchmark.”

The pension system hired Verus in January to help research possible changes to its benchmark, which were reported back on Tuesday.

Instead of changing to another PE benchmark, staff recommended adopting an additional benchmark, the State Street PE Index (SSPEI) ALL PE excluding Private Debt peer universe benchmark.

Liposky described this set-up as “two different benchmarks that will serve two different purposes.”

The Russell 3000 would serve as a “strategic benchmark” to measure whether or not private equity is in fact providing better returns than public equities to justify the illiquidity of the assets. The State Street index would serve as an “implementation benchmark” to measure whether or not the system is choosing the right managers.

A presentation to the committee showed the State Street benchmark had similar geographic and strategy breakdowns as MassPRIM’s portfolio. Other finalists were benchmarks from Burgiss and Cambridge Associates.

The investment committee voted unanimously to adopt the new benchmark. The next step is for the full MassPRIM board to approve the change at its meeting later this month. Following that approval, the change is slated to take effect July 1.

Los Angeles City Employees’ Retirement System also uses the Russell 3000 plus three percentages points as its private equity benchmark and experienced similar issues, as Buyouts reported. Its investment committee has approved switching to a Cambridge benchmark to measure its PE program, as Buyouts reported.

Action Item: read the materials for MassPRIM’s May 4 investment committee meeting here.