Mendocino County pension, and adviser, cite fees, sluggish returns in bid to skip PE

Adviser Callan and the head of Mendocino County Employees Retirement Association both recommend the system not include private equity in the retirement system’s asset allocation mix.

It’s rare, if not stunning, for pension systems that do not currently invest in private equity to decide against adding it into their asset mix. Over the past two decades, institutional investors have overwhelmingly added or increased allocations to private equity, which has fueled the industry’s rampant growth.

The recommendations against adding private equity are included in an asset and liability study prepared by Callan for the $615 million system’s board meeting scheduled for February 15. Buyouts reviewed the documents.

The board will determine the system’s asset allocation policy at the February 15 meeting.

Based in Ukiah, California, Mendocino County targets an allocation of 62 percent to public equities, 21 percent to fixed income, 11 percent to real estate and 6 percent to infrastructure, according to board documents.

Mendocino County’s skepticism about private equity stems from two discussions at recent board meetings.

At the board’s January meeting, adviser Callan projected the system would return 7 percent over the next decade with its current allocation mix. This was an improvement from Callan’s 2022 projection, which estimated the system would only return 6 percent.

Callan projected better long-term returns in both fixed income and public equities compared with its 2022 outlook, according to board documents prepared for the January meeting.

Buyouts reviewed documents and watched a taped broadcast of the January meeting.

The improved outlook on the fund’s 10-year forecast played a role in Callan and the investment staff’s recommendation against adding private equity to the system’s portfolio.

In the February documents, Callan considered options for private equity that would target allocations between 7 percent and 9 percent to the system’s total fund. These options resulted in only marginal improvements to the already expected outcomes, according to Callan’s presentation.

“Considering this, Callan does not see a compelling need to add a new allocation to private equity at this time,” the adviser wrote in its presentation.

Mendocino County’s lead financial investment officer, F Robert Reveles, wrote in a separate note before Friday’s board meeting that adding private equity would increase the amount the system pays in management fees by 130 percent annually.

Reveles also said adding private equity would increase the work load for the system’s investment staff when managing cashflow projections, capital calls, audits, quarterly financial reports and additional reporting requirements.

Potentially adding private equity to its allocation mix was also a primary topic of discussion at the system’s November board meeting, also viewed by Buyouts.

Board members at the November meeting were concerned about how private equity would affect the system’s liquidity and the possibility of rising interest rates limiting returns for private equity investments in the years ahead.