Overexposed San Francisco pension proposes reducing PE target

San Francisco Employees’ Retirement System, well over its private equity target, is considering dialing back its pace and refocusing on fixed income.

Many US public pensions found themselves overexposed to illiquid private equity as public markets cratered in the run up of the interest rate environment over the past couple years.

As public markets have strengthened, some of that overexposure has eased.

However, institutions have also found appetite for more credit exposure, both through public and private investment vehicles. At its board meeting scheduled for April 10, San Francisco will consider reducing its private equity target to 20 percent, from 23 percent, while increasing its public credit target by 7 percent.

Buyouts reviewed a presentation detailing the proposed asset allocation changes in advance of the meeting.

The $35.4 billion system currently allocates 28.4 percent of its portfolio to private equity, ranking as one of the nation’s more aggressive public LPs. According to consultant Wilshire, San Francisco can expect to reach the 20 percent target within three-to-five years.

The system looked to deploy $1.2 billion in annual private equity commitments over the next three years, according to the last annual report of its program – a figure which will be reduced if the board approves the new target.

A slowdown by the pension of its allocation to private equity (including venture capital and growth) would be a blow to the venture capital fundraising system, which remains challenging.

According to the annual review, VC makes up 38 percent of the system’s private equity portfolio, ranking above buyouts with 36 percent, with growth equity fund holding 24 percent.

This makes San Francisco a rarity among public pensions, which overwhelmingly steer clear of deploying such a large chunk of their portfolios to venture capital.

The proposed changes would increase San Francisco’s public credit allocation from 5 percent to 12 percent. The system’s public equity target would also be reduced from 37 percent to 32 percent, the presentation said.

The increased target to public debt would increase the pension’s liquidity, as half of its public debt is considered liquid, Wilshire said.

According to the presentation, San Francisco also considered reducing its private equity target to 18 percent in two other strategic asset allocation options.

Wilshire projected that private equity would return 9.2 percent for San Francisco over the next decade in the capital market assumptions it used when formulating the proposed strategic asset allocations.

These returns would rank as the system’s best performing asset class, but also by far its riskiest, according to a presentation Wilshire made earlier this year to San Francisco’s investment committee.