Anticipating higher payouts to retirees in the years ahead, the Pennsylvania State Employees’ Retirement System plans to throttle back its allocation to buyouts and venture capital in favor of more conventional stocks and bonds.
The board, meeting in December, adjusted its allocations to various asset classes, “in order to meet the liquidity needs arising from a projected increase in benefit payouts as the fund matures,” the agency said in a press release. Its actuaries expect it to pay out $2.6 billion in benefits and expenses in 2011, but the amount is expected to climb to $4 billion by 2020.
Accordingly, the agency, which manages a fund of $24.4 billion in assets, plans basically to reverse its allocation to alternatives—buyouts and VC—to 15 percent from its current 24.5 percent target (and 25.1 percent actual allocation) in favor of fixed income, now a targeted 17.5 percent of the portfolio (and actual 15.4), which is slated to rise to 26 percent.
Even so, the agency, called SERS, is still making commitments to the asset class. And spokeswoman Pamela Hile emphasized that the pullback that the agency is planning will be gradual. Rebalancing the portfolio is likely to take until 2015.
“While we are still making commitments to alternatives, we are not making new commitments at the same levels as in the past,” Hile wrote in an e-mail message to Buyouts. “As we receive distributions from existing PE/VC funds, much of that money will be available to be reallocated elsewhere over the next five years.”
Likewise, the agency cut its allocation to fund-of-hedge-fund absolute returns to a 9 percent target from a current 15.5 percent, while increasing its allocation to stocks to 39 percent of its portfolio from a current 30 percent. Other adjustments: real estate, reduced to 8 percent from 9.5 percent; and inflation-protection, target unchanged at 3 percent. At the end of the third quarter, 1.9 percent of the fund was in cash; the agency does not include a cash allocation in its targets.
Even so, SERS made additional follow-on commitments to three funds at its December board meeting. The LP committed up to $30 million to the British buyout shop BC Partners for its €6 billion ($7.7 billion) BC European Capital IX LP fund, which is reported to offer investor-friendly terms, such as an early-bird discount on fees and reimbursement of all its transaction fees to investors, up from only 80 percent in its previous fund.
SERS also committed up to $20 million to Meritech Capital Partners for its Meritech Capital Partners IV LP fund. The firm, which focuses on late-stage venture capital investments in infotech and medtech companies, has raised more than $2.2 billion in its previous three funds.
And the LP pledged up to $25 million to SFC Energy Management LP for its sophomore fund, SFC Energy Partners II LP. The Denver GP invests in the onshore oil and gas industry in North America.