MassPRIM ups private equity target, reduces 2023 commitments

'We have observed...that some of our highest performing private equity vintage years originate during volatile times like this,' CIO Michael Trotsky said.

Massachusetts Pension Reserves Investment Management will increase its target allocation to private equity in 2023, while also reducing the amount it plans to commit to the asset class.

Many pension systems find themselves in a juggling act as they must combine their bullish outlook towards private equity against the concerns of being over-allocated to the asset class due to the denominator effect. The latter occurs as private market valuations lag the direction taken by public market valuations by several quarters.

At its meeting held on February 16, the $92 billion system’s board of trustees voted to increase MassPRIM’s targeted allocation range to private equity by one percentage point, to 13 percent to 19 percent, up from 12 percent to 18 percent.

Buyouts reviewed documents pertaining to the board meeting.

At the same time, the board also approved a plan to commit between $2.2 billion to $3 billion to private equity in 2023, down from $2.7 billion to $3.3 billion last year.

MassPRIM currently allocates 17.7 percent of its total fund to the asset class, according to board documents.

Increasing the targeted range gives the system more flexibility in managing its private equity allocations. Decreasing the amount it plans on committing will help it stay comfortably within that range in an unpredictable economy marked by rising interest rates, inflation and other macro-factors.

MassPRIM chief investment officer Michael Trotsky noted in his report to the board that 80 percent of the system’s peers are between 4 percent and 6 percent over their targeted ranges to private equity.

“Maintaining a consistent pace of private equity commitments has been a key contributor to our long-term success. We have observed throughout our history that some of our highest performing private equity vintage years originate during volatile times like this, when other investors may be cutting their commitments for a variety of reasons,” Trotsky said in his report.

According to the presentation, MassPRIM, State Teachers Retirement System of Ohio and New Jersey Division of Investment also have a 6-percent range for private equity target allocations, which rank as the lowest.

Increasing the targeted range for private equity would result in a 10-year expected return of 9.4 percent and 30-year expected return of 10.2 percent, when using the most recent assumptions for the asset class, according to consultant NEPC.