NYC Pensions, which has seen rise in PE performance, pledged $855 mln in Q4

  • Why is this important: PE returns have been climbing for 8 years
  • For the first time, all 5 systems show net IRR exceeding 10 pct
  • AUM: $197.3 bln
  • Contact the NYC Controller’s Office: +1 212-669-3916

New York City Pension Plans committed $855 million to private equity funds in Q4 2018 and the start of 2019, backing longtime partners KKR and Warburg Pincus as well as a smaller manager and a secondaries fund.

The five city pensions collectively manage $197.3 billion in assets, with a 6.5 percent aggregate allocation to PE. The biggest contributors to PE over the recent quarter-plus were the $63.8 billion New York City Employees Retirement System and the $71.5 billion Teachers’ Retirement System of the City of New York, which committed $369.6 million and $333.3 million, respectively.

All five pensions committed to the same PE funds in the third and fourth quarters of 2018, as well as the first few weeks of 2019, according to pension fund documents.

In Q4 2018 and early 2019, the city pensions committed:

  • $250 million to KKR European Fund V, a generalist buyout fund with a €5 billion ($5.84 billion) target and a focus on the U.K., the DACH region, the Nordics, France, Italy, Spain and Benelux;
  • $60 million to Grain Communications Opportunity Fund II, a $750 million fund that will pursue communication investments across North America, including fiber, spectrum and cell tower assets;
  • $100 million to Palladium Equity Partners V, a buyout fund with a $1.5 billion target, which will focus on undermanaged founder-owned businesses that can benefit from a growing U.S. Hispanic population;
  • $296 million to Lexington Capital Partners IX, which will pursue secondary transactions in the U.S. and Europe with a $12 billion target size; and
  • $360 million to Warburg Pincus Global Growth, a $13.75 billion fund that will invest globally across numerous sectors.

During the pension funds’ quarterly investment meeting in March, CIO Alex Doñé said private equity returns have been climbing since 2011, when the city brought on new consultants and new PE staff, and changed its underwriting standards and investment strategy.

All five pension systems are now showing net IRR since inception above 10 percent, for the first time ever, Doñé said.

Overall, the pensions’ PE performance has lagged its benchmark, which is a public markets equivalent plus a 300 basis point illiquidity premium, dragged down by pre-2011 return numbers.

Since inception, none of the five pension funds have reached that benchmark, and the two largest pensions funds, the NYCERS and Teachers’ pensions, have underperformed the public markets even without accounting for a illiquidity premium.

Four of the pensions began investing in PE in 1999, while the Board of Education Retirement System began investing in PE in 2006.

The fourth quarter commitment pace is similar to the pensions’ third quarter, when they committed $825 million to three private equity funds. Again, all five pensions committed to the same funds, in varying amounts.

In the third quarter, the NYC pensions committed:

  • $500 million to Vista Equity Partners Fund VII, focused on enterprise software that provides recurring revenue;
  • $250 million to Welsh, Carson, Anderson & Stowe XIII, a North American buyout fund focused on the information/business services and healthcare sectors,  and
  • $75 million to Raine Partners III, a North American growth equity fund that focuses on entertainment, sports, gaming, lifestyle and digital media and internet industries.

The five pension systems share a CIO and an investment staff, centralized in the Bureau of Asset Management within the city comptroller’s office.

Action Item: See the NYC pensions’ latest quarterly investment reports here