PA PSERS to double PE co-investments, hire staff to cut fees

  • Assets under management: $56 bln
  • Private markets allocation: 13.6 pct
  • Private markets assets under co-investment: $750 mln
  • PE co-investment allocation: 6.2 pct
  • PE strategy: The pension fund is ramping up its co-investments to reduce fees
  • Whom to contact: Evelyn Tatkovski Williams, press secretary at
  • Why this is important: LPs are taking firm steps to reduce manager fees

Pennsylvania Public School Employees’ Retirement System, at its Aug. 10 meeting, moved forward with a plan to reduce $2.4 billion in investment fees over 30 years.

The long-term recommendations include doubling the private equity co-investment portfolio and hiring more investment professionals.

The retirement system expects further discussion and review of the co-investment program at its October board meeting, a spokesperson told Buyouts.

PA PSERS’s $7.9 billion private-markets portfolio includes PE, venture capital and private debt. PE makes up more than two-thirds (68.5 percent) of the private-markets portfolio.

The system’s $1.2 billion co-investment program is spread across all asset classes, with $750 million of that in private-market co-investments, Charles Spiller, deputy chief investment officer of the pension fund, previously told Buyouts.

PE co-investments formed 6.2 percent of its $7.9 billion private equity portfolio as of June 30, 2017.

The system’s investment staff seeks to add $460 million over the next three years to increase the private equity co-investment allocation to $950 million, or 12 percent of the private equity portfolio, documents said.

In addition, the pension system wants to add three investment professionals, including one in operations, to its six-member team. Currently, two PE team members look at co-investment deals, though all team members pitch in when required, Spiller had said.

PA PSERS may also explore partnerships with other pension funds for co-investments. It will also seek to co-invest with GPs it does not have relationships with, documents said.

With increased co-investment pacing, externally managed private equity assets will decrease to $6.96 billion, resulting in management fees decreasing to $96 million and $6.7 million in annual savings, documents said.

Deduct the increased personnel cost of $1.05 million, and all in the pension fund will save $5.65 million per year, documents said.

Over 30 years, the projected savings in private equity from increasing in-house staff and higher co-investments will be $691 million, documents said.

Boosting the cap

Earlier in May, PA PSERS increased its co-investment and secondary investments program limit for PE to $750 million from $500 million for 2018.

It also added $10 million for follow-on investments in each co-investment deal; the initial co-investment per deal is $25 million.

The pension fund has invested in more than 30 co-investment deals, Spiller said.

Started in 2012, the co-investment program has posted an internal rate of return of 31.1 percent and a multiple of paid-in capital of 1.72x for the total fund, documents said.

The Pennsylvania public pension systems have come under scrutiny for high management fees.

The Public Pension Management and Asset Investment Review Commission, created under Act 5 of 2017, is developing recommendations for possible additional fee savings and efficiencies for PA PSERS and its sister fund, Pennsylvania State Employees’ Retirement System.

“This plan builds upon PSERS’s hard work to reduce base fees and manage risk,” James H. Grossman, chief investment officer, told Buyouts. 

“We look forward to reviewing the PPMAIRC recommendations later this year. These actions taken today by the Board to accept the long-term plan do not prevent us from considering further action on any PPMAIRC recommendations later this year.”

Action Item: Read more on the new proposals here